Zero Percent Financing: Is It Worth It?

Auto financing is a big deal to Auto Trends readers. Our web analytics demonstrate that this is so with our guests frequently checking out what manufacturer incentives are being offered. We are happy to pass on that information to you, but you should also know that not every advertised deal is a good one.

Zero Percent Financing

For a number of years, car manufacturers have been touting zero percent financing as an important incentive to get you to buy a new car. Such incentives come from the manufacturer’s financing arm, what typically is a wholly-owned subsidiary of the car company. Thus, when you get financed by Ford Credit, the Ford Motor Company stands behind this company.

Zero percent financing is both a big deal and usually a good deal. But not always.

If the loan deal is made the financing arm, then you have something worth looking at. However, if interest-free financing is offered by a lender other than the manufacturer-backed financing company, don’t be so quick to sign the loan.

Here’s why:

Car manufacturers can afford to offer you zero or very low-interest rate financing because that cost is built into the price of the car. Usually, if low rebate is dangled too. That rebate may range from $500 to $2,000, sometimes more, which shows you that the manufacturer is discounting the price of the car in one of two ways: through the loan or with the cash incentive.

Ford Credit, for instance, makes money because the Ford Motor Company makes money. Other lenders make money by charging you an interest rate. If you are offered zero percent financing, that means your dealer is likely jacking up the price of the car to recover his costs. After all, he has to pay the lender for the loan and that cost must be recovered somewhere — and that is where you come in. And you get fleeced.

Loan Qualification

There is another matter about zero percent car loans that few consumers realize: most people do not qualify for this ultra-low rate. As money advisor Clark Howard has noted, about 60 percent of car shoppers cannot get such loans.

The lowest interest rate loans are always reserved for people with excellent credit. It is kind of hard to read the fine print on your television, right?

Auto loan rates are calculated largely on the prevailing rates of our day as well as the personal credit score of the applicant. Excellent credit is typically around 750 and above. At 720, your score is still very good, but expect that zero percent financing loan to turn into one for two, three or four percent, perhaps more. That isn’t such a great deal after all — your credit union can beat it.

The Deal

The best way to buy a car is paying cash for it. Only about 11 percent do according to Cars.com.

That leaves some type of financing for the rest of us with car leasing and auto loans your options. With an auto loan, you can seek financing through your dealer. You can also arrange your financing on your own.

Auto Trends has long encouraged people shopping for a new car to explore their financing options before hitting the dealership. This means talking with your banker or credit union representative about your loan options.

You not only can learn what your loan terms will be, but how much car you can afford. Get approved for you loan ahead of time and the entire financing deal is off the table. Negotiate the best deal for your car and when the talk turns to financing, you hand over your loan papers. If a cash incentive is offered, then use that toward your down payment.

Auto Calculator

Of course, always use an auto calculator to figure out what loan is right for you. If you have excellent credit, your options are much broader than sub-prime borrowers, individuals whose fate is a bad credit car loan or no loan at all.