Q: I’m in the market for new wheels, and I’ve seen dealers advertising zero-percent financing. Should I take this offer?
A: There are many factors to consider before deciding on a zero-percent financing loan. Let’s take a look at no-interest loans so you can make an informed, responsible decision.
What is zero-percent financing?
An auto loan offer of zero-percent financing means the financer is offering to lend the buyer money without charging any interest over the life of the loan. Zero-percent car loans are offered through the auto manufacturer, which benefits from the loan as much as it would from an upfront cash payment on one of its cars.
Zero-percent financing loans are typically only offered to buyers with a credit score above 700 who have a long credit history.
The pros of zero-percent financing
For buyers who qualify, a zero-percent loan may be a way to save on steep interest payments throughout the life of an auto loan. A buyer can easily save several thousands of dollars in interest payments over the life of a zero-percent-financing loan. It’s crucial that qualifying buyers crunch the numbers to be sure they can easily afford the monthly payments on one.
The cons of zero-percent financing
Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. Buyers may be blinded by the temptation of not paying interest and consider a vehicle with a higher monthly price tag than they planned.
Another point to consider is the loan term. Many zero-percent financing loans are only four years long, which can increase the monthly payment significantly.
Even if the loan terms do meet the buyer’s needs, it still may be worthwhile to skip the zero-percent financing and take out a traditional loan so the buyer won’t miss out on cash-back rebates, which are typically not available on auto loans with special financing offers.
For example, a car selling at $20,000 with the offer of a zero-percent financing loan to be paid in four years will have a monthly payment of $416. That same loan, taken out over five years through a credit union, at the average national annual percentage rate (APR) of 3.45 percent, would have a monthly payment of $363. If this car would have a cash-back rebate of $2,500, its price drops to $17,500. Through a loan with an APR of 3.45 percent, the monthly payments are just $318. The total amount paid on the car would also be less than the amount paid through the no-interest loan, at $19,080.
If you’re ready to get started on your auto loan, stop by today to get started. We’ll have you seated behind your new set of wheels in no time!