Is 0% Car Financing Too Good to Be True?

is 0% financing too good to be true

With interest rates at what they are, you may be tempted to take up an offer of a 0% car loan without hesitation. However, it's important to take all the information into consideration before you make a decision. Not all 0% car loans are actually 0%, and you may find you could have made a better decision in the end. Remember: the interest rate is only a piece of the puzzle. You must also consider how much you'll be paying each month, and what a lower payment could do for your savings. So, is 0% car financing too good to be true?

Interest Cost is Not the Only Factor

People are so often concerned with how much they'll be paying in interest, that they allow that to be the main focus. We urge you, or your client, to take everything into consideration first. Then, you can determine which will be the better course of action. It's going to depend on how much debt the client has, what the interest rates are, the monthly payments, and their current financials. The “best” decision is different from person to person, and low interest is not always in your client's best interest.

Buying a Car: Cash vs. Financing

Car dealerships have different prices for cash deals than they do for financed deals.  Let's say you get a quote for a car and it's $30,000 if you pay cash. Usually, the cash price reflects a rebate of some sort. So the price of the car might be worth $35,000, yet you'll get a $5,000 rebate for paying in cash.

If you try to finance at the cash price, the dealership will often back out. They won't say as much, but they want you to take the 0% financing precisely because it's not 0%. Yet they know that people are tempted by “saving” interest cost.

Unfortunately, the reason they can offer you “discounted” interest rates is because they add the interest into the cost of the car. For example, when purchasing a car, the dealership may offer you either a $5,000 rebate OR a 0% financing deal. You don't get both. And that $5k difference is actually the interest cost built into the price of the car.

Is 0% Car Financing Too Good to Be True?

Let's do the math, so you can see clearly how the interest is baked into the 0% financing. In this instance, the dealership has a $35,000 car. They're offering either 0% financing over 48 months, or you can pay cash and get a $5,000 rebate.

Let's put the 0% financing scenario into a Payment Calculator. When you do that, the monthly payment comes out to about $729.

car financing. Is 0% actually 0%

On the other hand, let's say you take the rebate. Instead of paying cash, you'll seek your own financing at the bank for $30k. If you get a 48-month loan from the bank at 7.5%, you're paying about $725 a month. That's just a smidge less than the alleged 0% financing. Isn't the 0% financing supposed to save you money?

Car financing, 0% isn't 0%. Difference between a rebate and 0% financing.

The reason is pretty simple: in order to offer the 0% interest rate, the car company added the interest cost into the price. This same “half-truth” is used for most of the abnormally low-interest rates that car companies typically advertise. And there are almost always rebates. Some of them simply aren't published, you have to ask for them.

What If You Actually Pay Cash?

You may think that obviously, the best option would be to actually pay cash, then. After all, you'd save $5,000 and you wouldn't have a monthly payment. Unfortunately, there's the opportunity cost to consider. This is the cost of making one decision over another.

If you were to pay cash for your car, that's $30k of liquidity that you're losing out on. That's money that could be used for emergencies or opportunities. All things created equal (interest rate, time frame, etc), what if you were to take the bank financing? You'd be able to keep that $30k where it is, in a place where it could be earning 7.5% (remember, all things equal). Over 48 months, that $30k would grow to over $40k. That's more than $10k of growth, which is certainly higher than the $5k interest cost.

Cost of cash. Opportunity cost. Paying cash for a car.

So by paying cash, there could actually be a significant opportunity cost.

What's the Takeaway?

The moral of the story here is that the car financing offered at a dealership is not what it seems. One of the best things you or your clients can do when car shopping is to ask for the cash price. Then, with that cash price in mind, you seek your own financing. Before you make a decision, you can use the Truth Concepts financial calculators to analyze your options. You may find that the bank can actually offer you a better interest rate than the supposed 0% financing. That could leave you with lower payments and less interest cost.

Remember, most car companies make their money from financing the cars, not manufacturing them. They can't make that money by offering 0% or 2.9%. You may ultimately choose that option depending on how the chips fall, yet you're going to be much happier once you've crunched the numbers yourself.

To learn more about how you can use Truth Concepts for this kind of analysis, come to a Truth Training. You'll receive 3 days of in-depth learning on every single TC calculator, surrounded by some of the brightest minds in the business. For more information, you can contact Katie at su*****@tr***********.com.