In the market for a new vehicle and tempted by the zero-percent financing options offered by some dealers? Before you say yes, keep in mind there are many factors to consider before deciding on a zero-percent financing loan. Let’s take a look at no-interest loans so you can make an informed, responsible decision.
What is zero-percent financing?
An auto loan offer of zero-percent financing means the financer is offering to lend the buyer money without charging any interest over the life of the loan. Zero-percent car loans are offered through the auto manufacturer, which benefits from the loan as much as it would from an upfront cash payment on one of its cars. Zero-percent financing loans are typically only offered to buyers with a credit score above 700 who have a long credit history.
The pros of zero-percent financing
For buyers who qualify, a zero-percent loan may be a way to save on steep interest payments throughout the life of an auto loan. A buyer can easily save several thousands of dollars in interest payments over the life of a zero-percent-financing loan. It’s crucial that qualifying buyers crunch the numbers to be sure they can easily afford the monthly payments on one.
The cons of zero-percent financing
Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. Buyers may be blinded by the temptation of not paying interest and consider a vehicle with a higher monthly price tag than they planned. Another point to consider is the loan term. Many zero-percent financing loans are only four years long, which can increase the monthly payment significantly.
Even if the loan terms do meet the buyer’s needs, it still may be worthwhile to skip the zero-percent financing and take out a traditional loan so the you won’t miss out on cash-back rebates, which are typically not available on auto loans with special financing offers.
For example, a vehicle selling at $20,000 with zero-percent financing for four years will have a monthly payment of $416.67. That same loan, taken out over five years through Ideal Credit Union at 3.29% Annual Percentage Rate (APR), would have a monthly payment of $361.96. If this vehicle had a cash-back rebate of $2,500, the price drops to $17,500. At 3.29% APR the monthly payments are just $316.78. The total amount paid on the vehicle would be $19,002.66, which is $997.34 less than the zero-percent financing option.
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