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Zero-Percent Financing: Financial Fact or Fiction?

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When you hear or see ads touting zero-percent financing, your first reaction may be one of skepticism. How can any finance company offer a car loan with no interest? Yet, zero-percent financing is currently one of the most popular incentives in the automotive industry, and it is offered by the finance arms of major automotive manufacturers.

Just as they offer vehicles with cash rebates, car companies subsidize the finance arms of their corporations, essentially pre-paying the loan interest on specific models. Each company follows the individual formula that works best for it depending upon the cost of the vehicle and the loan term.

The automotive industry on the whole has been on a downward sales trend since before the events of 9/11 and, since that time, zero-percent financing has been offered on more brands than ever.

Does zero-percent financing work? In large part, yes. According to the J.D. Power Dealer Finance Study, it is considered to be one of the most successful motivators to get car buyers into dealerships. Another side of the issue is that while the enticement of zero-percent financing brings many car buyers into the dealerships, those buyers may not necessarily end up with the zero-percent loan -- for a variety of reasons, which we'll explore.

When it comes to zero-percent financing, what is fact and what is fiction?

  1. Zero-percent financing usually requires a shorter-term loan, which can require higher payments.
    The most common zero-percent finance deals tend not to extend for as long as the conventional auto loans, so many buyers may opt for the conventional loans in order to keep the monthly payments lower -- even though they will end up paying a lot more money in the long term. There are, however, exceptions to this rule, in which zero-percent financing may be offered in longer terms.
  2. Zero-percent financing requires unblemished credit to qualify.
    Not necessarily, as some finance programs are moving to go after an expanded audience of buyers with less than perfect credit scores.
  3. Zero-percent financing is available only on a limited number of models in dealer stock -- not on special orders or certain option packages.
    Most zero-percent deals tend to apply only to the vehicles on the dealer lot and they may not include special option packages or premium models.
  4. Zero-percent financing is usually offered in an either/or situation with a cash rebate and you must choose between the two.
    Most of the programs typically follow this formula.
  5. If you qualify for zero-percent financing, negotiating a lower price on the vehicle may be more challenging.
    Although this may happen, a reputable dealership will be open to negotiating the deal before applying the zero-percent financing to your sale. As always, we recommend you do your homework before buying.
  6. Even if you do not qualify for zero-percent financing, excellent interest rates are available.
    An online lender such as RoadLoans.com, can, in many cases, get you a lower interest rate than a dealer might offer. For this reason, we recommend shopping loans online to make the best possible choice before you go to the dealership.
With all these facts in mind, many people will be attracted to zero-percent financing. Although this trend has been around for a couple of years, most industry experts believe it can't last forever. With the advent of lower interest rates and flexible terms, today's car buyers are finding creative financing options at an all-time high. And, with the economic challenges facing many car buyers, these programs will continue to bring buyers into dealerships.