Since we are writing this in 2009, there are some true 0% car loans in the market place due to the economy in general and the condition of the automobile industry in particular.  However, knowing the whole truth about your money is critical in knowing how best to finance a car and there is much misinformation around this area.  Don’t be sucked into making higher payments because it’s only 0%!

What happens to car buyers is they get focused on the payment.  A car dealership has a different price for a cash deal than a financed deal.  Lets say you get a quote for a car and its $30,000 if you pay cash.  (That should always be your starting point.)  If you try to get financing at that price, they’ll back out.  They will want to charge you $30,000 for the car if you take their 0% financing.

Car companies offer different deals on the same car, depending on whether you pay cash or use their financing.

They add interest to the cost of the car when offering the “discounted” interest rates.  What does that mean? That is because there is EITHER a $5,000 rebate OR a 0% financing deal.  So in reality they have added interest to the price of the car that they will take off the price of the car and call it a rebate if you pay cash or finance it from an outside source instead of using their internal financing.  As an example, here is the whole truth about your money.

Car manufacturer has a $35000 automobile; you can accept their 0% 48 month financing or take a 5,000 rebate.  If you choose their financing at 0%, your payment would be ($35,000 / 48 = 729.17)  $729.17. 
 
 
 

OR you can take the 5,000 rebate and finance the difference at your own bank so 30,000 (35,000-5000 rebate) for 48 months at 7.5% at the bank equals a payment of $725.37 
 
 
 

So why is using the automobile financing at 0% causing a payment that is more than the payment when we use the bank at 7.5%?  Because the car financing deal added the interest cost to the price of the car in order to advertise a 0% rate.

The same “half-truth” is used for the 2.9% rates and other abnormally low interest rates that are advertised in the marketplace.  Sometimes the rebates are published, sometimes not.  Moral of the story: What you will want to do is ask for the price of the car if you pay cash.  Remember, most of the car companies make most of their money from the financing arm, not the manufacturing arm.  How can they do that at 0% or 2.9%? They can’t.