0-Percent Financing: Is it nothing or something?
A 0-percent financed loan is a great deal for new vehicle shoppers hoping to save money. It’s an opportunity that shouldn’t be overlooked as automakers shackled with ballooning vehicle inventories resort to 0-percent financed loans to move the metal. Manufacturers are also motivated to use subsidized rates because it’s a way to hold onto market share and sales momentum as vehicle prices increase.
“It is a great opportunity for consumers to save money on a monthly basis, make that vehicle more affordable or perhaps make it possible to afford a slightly different (or more expensive) vehicle than they originally had been shopping for,” Melinda Zabritski, senior director of automotive finance at Experian, said of the offers.
There is a long list of financial advice on the internet about taking the shortest term possible in order to reduce the amount of interest paid over the life of a loan. “That argument pretty much goes away with a zero percent rate,” Zabritski said.
Higher prices drive deals
Over the past years, vehicle prices, loan amounts and monthly loan payments have been rising at a steady pace. Kelley Blue Book estimates that the Average Transaction Price (ATP) for light vehicles has topped $35,000. Part of this increase is due to consumers switching from sedans to more expensive crossovers and SUVs.
“We have loan amounts at an all-time high. Payments are at an all-time high. The lending market has been attempting to help reduce some of those payments through longer term loans but of course there still is the interest rate,” Zabritski said. She explained that Experian data shows the average loan for a new vehicle in the fourth quarter of 2016 was $30,621. The average monthly payment in the fourth quarter of 2016 was $506 for the purchase of a new vehicle, up from $493 a year earlier. However, the average monthly payment had been basically unchanged from the fourth quarter of 2008 to 2013, averaging in the mid-$460 range.
“It’s a big jump from about $460 to over $500 in just a couple of years,” she said. As for the future, “I think we will see increasing issues around affordability, vehicles becoming more expensive. If rates start creeping up, which we know that is going to happen, that will all drive up monthly payments.”
If an automaker offers a 0-percent rate or an extremely low interest rate on longer term loans, “that is a great option for consumers to spread those payments over a longer time and not pay any incremental interest on those longer term loans,” Zabritski said.
Beware of being “upside down” in the loan
The trend of consumers opting for longer new vehicle loans is growing. The percent of buyers selecting loans ranging from 73 to 84 months in duration increased from 29 percent of the market in the fourth quarter of 2015 to 32.1 percent a year later. Of course, there is no such thing as a free lunch. Depreciation can be a potential drawback when the vehicle is traded years for another model.
“If they do chose a longer term loan, and (later) decide not to stay in that loan’s long term, they will run into a negative equity situation when they go to trade that car,” she said, owing more money than the car is worth, which is known as being upside down.
The other factor to take into consideration is whether or not the 0-percent financing is tied to other conditions. In the past, most of these deals were given in lieu of rebates or other cash incentives, but that’s no longer the case. And some cash buyers looking to pay cash are wary at the 0-percent option fearing some hidden catch.
An Illinois Chevrolet dealer discovered just that. A buyer eligible for an extra $1,000 in savings with the 0-percent loan was adamant he just wanted to pay cash for a $40,000 pickup. “I said, sir, you are going to pay $1,000 more if you pay cash,” said the dealer who asked not to be identified. A $1,000 rebate was good only if the buyer accepted a 0-percent loan. “He was bound and determined not to use it but I convinced him,” the dealer said. A minimum loan amount at the shortest term possible for the 0-percent loan, which was less than a year, was agreed upon. The buyer then received $1,000 that was applied to the purchase.
Qualifying is the key
The only big drawback to 0-percent financing, especially for buyers with lower FICO scores, is that not everyone qualifies for the loans. Zabritski stressed that you should also read the fine print on the automaker’s website for “some sort of credit qualifying statement. They might reference it as Tier 1 and Tier 2 customers only, Grade A customers only, something like that,” she said. And the subsidized rate also might be limited to a just handful of models in dealer stock.
These 0-percent deals are generally offered through automakers’ finance subsidiaries. But the qualifications for loan approval can vary from make to make. A consumer may be approved for a 0-percent loan at one automaker and turned down that same day at another. “Unfortunately, consumers will not be able to figure out if they qualify until they are at the dealer applying for that loan because there will be more than credit scores they are going to roll into the approval process,” Zabritski noted. “Each one is different.”
Toyota Financial Services, for example, might have one credit score rating that would qualify a buyer for a consumer loan and Ford Motor Credit might have something completely different. Zabritski urges car and truck buyers to have a backup plan in the event they are rejected for a 0-percent deal. Prior to applying for that loan, they should contact their bank or credit union to determine the interest rate, loan terns and the monthly payment for that vehicle.
Loan pre-approval sets limits
Being pre-approved by an outside lender sets a ceiling on the amount of interest you will pay over the life of the loan and gives the shopper additional leverage. “The more informed the customer is, the better position they are going to be in when it comes to negotiating the deal and closing the transaction at the dealer,” Zabritski said.
Additionally, if the automaker is offering a choice of a 0-percent loan or a rebate, negotiate two separate deals, one with the no-interest loan and the other with the rebate plus a loan with interest. Remember also to factor in the trade if any, that amount should be the same regardless of the terms of the deal.
Even if approved for the 0-percent financing, there still could be a problem for the consumer. Some of these contracts may be limited to a 36- or 48-month term, resulting in a higher monthly payment than your budget. A 72- or 84-month loan with a low interest rate from a credit union or bank might offer a more manageable monthly payment for the buyer, though you will be paying more for the car in the long run as a result of the interest and the extended terms. Fortunately, manufacturers have recognized the appeal of longer term loans and 0-pecent financing and are beginning to offer the low or no cost loans for 60 months or more.
And while having a source from an outside lender is a good plan, Zabritski counsels that “going to your bank or credit union doesn’t necessarily produce the best numbers. I always recommend go ahead, pull your credit ahead of time, know where you are on the credit scales, look at what your bank and credit union can offer, but certainly take into consideration the financing that the dealer can arrange for you.”
The dealer has relationships with many more banks and financial institutions that the consumer cannot contact directly and can steer the buyer into a low-interest loan if an application for a 0-percent loan is rejected, sometimes at a rate lower than through a bank or credit union. In order to arrange the best possible terms, do your homework and above all, remain flexible on your options.