Potential Pitfalls When Buying a Car - 0% Interest

You May Not Get the Best Deal at 0% APR

Auto dealers often advertise zero percent financing to entice potential buyers to visit the showroom. However, this option is not available to everyone. It’s usually reserved for those who have a credit score of 740 or higher.

​And, if you accept this deal, you may not qualify to receive manufacturer rebates or other incentives that may be offered to cash buyers or those who take standard auto loan financing. In addition, you may be “obligated" to include GAP (Guaranteed Asset Protection), Extended Vehicle Warranty Coverage and other ancillary items as part of the package which drives up the total cost of the purchase.

Another pitfall with zero percent financing is that you might be encouraged to buy a more expensive vehicle than what you had originally planned. In this case, the dealer may extend the financing to 72 or 84 months or even longer to help make the monthly payments more manageable. But, if you didn’t make a sizable down payment when you first made your purchase, you could be “under water” for quite a long time, where you owe more than what the car is worth. In other words, you’ll be locked into driving the car until you either have equity in the vehicle, which could take quite a number of years or you’ll have to roll over the amount you still owe into a new auto loan, which will make your next vehicle that much more expensive to buy.

In any case, it’s best to run the numbers to see which options would be best for you from the financial perspective:

 

Cash Incentive Example - $30,000 vehicle - $4,750 cash back = $25,250. With a loan at 4.00% APR for 5 years, total interest paid would be $2,651 = $27,901 Total ($25,250 + $2,651).

0% Interest Example - $30,000 vehicle ($30,000 - $27,901 = $2,099 price difference vs. the cash rebate scenario shown above).

FedChoice Financing Example - $30,000 - $4,750 cash back = $25,250 with a loan at 1.99% APR for 5 years, total interest paid would be $1,298 = $26,548 Total.

 

Resources:

Bankrate - https://www.bankrate.com/loans/auto-loans/0-apr-car-deals-are-they-worth-it/

Simple Dollar - https://www.thesimpledollar.com/loans/auto-loans/0-apr-auto-loans/

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