At some point we’ve all run across an advertisement on TV from a car dealer pitching some form of incentive. Manufacturer incentives are special offers designed to entice you to buy a car. Overall they have been found to be very effective in drawing consumers to car lots.
These deals usually come in the form of rebates (cash back) or a low annual percentage rate (APR). The APR is the amount of interest on the loan that you will pay during the year. Of course lowering the interest rate reduces your monthly payment. The lowest APR a manufacturer could offer would be zero percent, which means you pay no interest on the car loan.
Zero percent financing on a car sounds like too good a deal to ignore. Who should pass up free money, right? However, you may want to think twice before signing on the dotted line. There are several reasons these deals could be bad for the consumer.
The Story on Zero Percent Financing
According to the Consumer Financial Protection Bureau, zero percent financing offers are only available to consumers with the highest credit scores. So if there is negative information on your credit report it could keep you from receiving this special incentive. Once the dealership finds out the status of your credit they will say you don’t qualify for the zero percent rate and then try to switch you to a higher APR. Because you have new car fever you accept the higher interest rate and end up not getting the deal you intended, which results in you paying more.
The zero percent incentive may also result in a higher monthly payment because of the payment terms. With most traditional auto loans, borrowers can secure a loan they can pay back in three to five years – maybe even up to seven. A zero percent deal however usually requires a borrower to pay back the amount in a shorter amount of time, most always less than 36 months.
While the zero percent loan saves you interest, the larger monthly payment could wreck havoc on your monthly budget. And because the length of time to pay back the loan is so short, car dealers often require a substantial down payment, sometimes as high as 25 percent.
You might also find that manufacturer rebates offer more savings than zero percent financing. A rebate offer will most likely come with a higher APR but don’t let the higher interest rate deter you. If the dealer gives you a choice to either take the rebate deal or take the zero percent financing deal, run the numbers through an auto loan calculator. You may find the rebate offer (coupled with a higher APR) would save you money over the zero percent APR offer.
What To Do Before You Buy
Before you find yourself at the car lot committing to a zero percent financing offer, take these steps to decide whether it’s right for you:
- Check your credit score. Zero percent loans are always reserved for people with an excellent credit score, which starts around 750. So even if you have a good rating, say around 720, you may find that zero percent financing offer balloons to two, three or four percent once you talk to the car dealership.
- Know what vehicles the rate applies to. Often zero percent financing only applies to a select few vehicles. These may be last years’ models the dealership is trying to get rid of or brands that are selling slowly. Avoid buying a car that doesn’t suit your needs just to receive a special financing offer.
- Calculate the total cost and compare it to other offers. Auto manufactures can afford to offer a zero percent rate because the cost is incorporated into the price of the car. In other words, they mark the vehicle price up to cover the cost of the interest they are losing on the loan. By increasing the overall cost they also increase the taxes you will pay on the car. Shop around for better financing deals at your bank or local credit union and be willing to take any rebate offers instead.
- Read all the fine print in the contract. Some zero percent loans come with special provisions that kick in after a grace period. Others may have stipulations if you default or are late on your monthly payment. Be aware of the charges that will be administered if this occurs.
Don’t be hooked in by a special financing offer that doesn’t benefit you. A little homework ahead of time and some discipline at the car dealership may save you money in the long run.
Questions: Have you ever been pulled into a zero percent financing offer only to have it backfire? What did you not realize about the deal that caused a problem? Would you rather have a rebate incentive or a low APR incentive? Has your credit score ever affected your ability to get a car loan?