Zero-percent Car Financing - Fact or Fiction?

By: Sean Patrick

What does zero percent financing really cost? Car dealers have been very successful with their zero percent financing campaigns - so successful that the concept has been repeated in other industries such as electronics, furniture sales and credit card companies.

According to CNW Research, only one-third of buyers who apply for zero percent auto financing actually qualify and only 10% of those deals actually close according to the National Automobile Dealers Association. CNW Research goes on to state that many zero percent qualifiers overpay for their cars, since they assume they're getting the best deal available and they fail to negotiate price. Automotive manufacturers use their own financing companies to underwrite these zero percent loans, each of which have their own credit qualifications. Generally speaking an applicant must have close to perfect credit to qualify for zero percent financing.

If you have been one of the fortunate ones that didn't get lured in with the 0% financing offers only to get switched to a higher rate because of "blemishes" on your credit and the dealer is now offering you that "free" money, here are some drawbacks you should be aware of before signing that deal.

Shorter Loan Terms. Some dealers offer 60 month terms, but 36 months is average. This means your monthly payments will be much higher.

Limited Inventory. The zero percent offers are generally reserved for models that are suffering lower sales and is almost never offered on pre-owned inventory.

Cash Back. Have you every noticed the "or" clause in those zero percent advertising ads "0% or $10,000 cash back?" That $10,000 you lose by opting for the zero percent financing is the actual cost of borrowing. This often equates to an interest rate much higher than a traditional car loan.
Adding up the Numbers A recent search of the website of one of the Big 3 automakers shows an offer of zero-percent financing on a 2005 mid size sedan. This is how the numbers work out.

Annual Percentage Rate
0%
6.95
$29,999
$29,999
Less Rebate
$0
$5000
Amount to Finance
$29,999
$24,988
Monthly Payment
$625
$596
Total Cost
$29,999
$28,608
Savings
$0
$1,391 Based on 48 months. Does not include taxes, administration or other fees dealer may charge.

This comparison doesn't take into account the fact that you are forced to purchase a new vehicle. Let's take a look at the same vehicle, same model year with approximately 10,000 km on it that was found by doing a quick search on the Internet.

Annual Percentage Rate
0%
6.95% pre owned
Cost of Car
$29,999
$19,999
Less Rebate
$0
N/A
Amount to Finance
$29,999
$19,999
Monthly Payment
$625
$478
Total Cost
$29,999
$22,944
Savings
$0
$7,055
By financing at a low rate and choosing a slightly used vehicle over new, a consumer would save over $7000 in this instance.

Online Credit Applications One of the most streamlined ways to secure financing for a new vehicle is to use one of the many online Canadian car loan services. These companies allow car buyers to fill out car loan applications free of charge.

This method is recommended for car buyers with all types of credit ratings. It can certainly help people with poor credit ratings secure the loans that they need, but buyers with good credit can benefit from them as well. Oftentimes, more than one dealership or lending partner will vie for your business, which enables you to choose the financing that is best suited to your budget.

Having a service arrange your financing also affords you the opportunity to spend your time focusing on other aspects of the car buying process. This time could be wisely spent researching what cars you can afford, and determining what your needs are. Armed with that information, and a loan secured at a dealership or from a lending partner, you're ready to begin shopping for a new car as a prepared and knowledgeable consumer.

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