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Auto Loan, Financial Literacy

Is a Zero Percent Dealer Financed Auto Loan the Best Choice?

Brittney Monteith | June 11, 2020

Auto manufacturers and car dealerships are offering zero percent financing on auto loans to entice buyers back to the market. But are these loans as good as they sound?   

As we move forward through the coronavirus pandemic, more businesses are ramping back up and getting to work to attract buyers. The auto industry has been hit as hard as other businesses and as their factories are being restarted, manufacturers and dealerships are putting programs and incentives in place to help move those who may have been just thinking about buying a car, out onto the showroom floor and behind the wheel of a new vehicle.

One of the biggest incentives being seen in the market is the offer of zero-percent financing. Brands across the spectrum are promoting deals promising no finance charges on loans secured through dealerships. From Jaguar to Jeep, with everything in between, chances are good that a zero, or near-zero loan may be available for a car that interests you. But before you head to the dealership, it is important to understand how these offers work and to decide if a zero-percent interest auto loan is right for you.

Zero Percent Auto Loans: Are the Savings Real?

Going for a zero percent loan with dealer financing may limit your ability to benefit from other incentives like rebates. In situations like this, where other discounts and rebates are not available in conjunction with zero percent financing, the manufacturer may be making up the lack of finance charges by charging a higher amount for the vehicle itself. Effectively, the interest charges you are not paying are just being rolled into the cost of the vehicle and the total loan value itself.

Let’s see how the costs compare over the life of a loan, one with zero % financing, and one with a manufacturer’s rebate.

Zero % Financing

List Price: $30,000
Rebate: $0
Financed Amount: $30,000
Interest Rate: 0.00%
Monthly Payment: $500
Finance Charge: $0

Total paid after 60 months is $30,000.

Manufacturer’s Rebate

List Price: $30,000
Rebate: $3,000
Financed Amount: $27,000
Interest Rate: 3.24%
Monthly Payment: $488.07
Finance Charge: $2,283.73

Total paid after 60 months is $29,283.73,
a savings of $716.27.

Zero Percent Financing: How does it Work?

In an effort to sell cars, auto manufacturers are willing to offer buyers financing on new vehicles that does not include interest charges on the money being borrowed to purchase the vehicle. Making this option available helps keep payment costs lower and can enable a buyer to afford a nicer car than would have been in their reach otherwise.

In some instances, these zero, or near-zero rates are paired with extended loan terms, sometimes up to 84 months. This again helps to keep the monthly payments on the loan low, but can also put a borrower in a dicey position down the road. With new cars depreciating in value by 20% or more in the first year of ownership and 10% per year thereafter, borrowers risk finding themselves owing more on a vehicle than it is worth. This can be particularly bad if a borrower wants a change in vehicle before their current loan is paid off, when they find themselves needing to finance not only the new vehicle cost, but the balance of the old loan as well.

Zero Percent Auto Loans: Specific and Limited

While zero percent loans can make sense for some people, they are not the answer for everyone. One big limitation associated with these loans is who can qualify. While the advertisements may say these loans are intended for “well-qualified buyers”, there are very few details readily available about who that is until you go to the dealership.

Excellent credit, scores above 700, are generally going to be the starting point to be considered for these loan rates. But other criteria can also apply and can vary from one manufacturer to the next, with some considering things like prior purchase history (Have you bought a Toyota in the past?).

These rates are also limited to specific models, model years and options packages. Given the current economic conditions, there are many offers available, but there is no guarantee that the car you are interested in will be eligible for this financing.

Getting the Best Deal

Before heading to a dealership, it is important to make sure you have done your research and thoroughly prepared. One of your greatest opportunities to improve the outcome of your car buying experience is to get pre-approved for a car loan from a financial institution you trust. Having this in hand puts you in control and helps ensure that you have all the facts to fully evaluate your options.

You will know what you qualify for, which can help you make your trip to the dealership more efficient and keep you focused on the vehicles that make sense for your financial situation. Being pre-approved also helps you to keep your options open and explore all the rebate and discount options that may be available when you are ready to purchase.

When you are at the dealership looking at your options or discussing them with sales person or finance manager, a quick Google search can help keep you in control. Searching for “car loan calculator” pulls up a convenient tool you can use to understand how your options compare. It allows you to enter loan details, so you can compare both the total cost of the car and monthly payments. This will make it very clear if the combination of the dealer incentive and your credit union auto loan provides you with a better deal than the dealer financing being offered.

Contact AmeriChoice Federal Credit Union to learn more about the great auto loan options and rates that our members enjoy.