In theory, 0% financing on your new car sounds like a good idea. Who wouldn't want to drive a new car today and pay for it interest-free over time? In fact, it almost seems too good to be true. That’s because, in many cases, it is. It turns out that choosing the 0% financing option often comes with a lot of fine print and because of that you might actually end up paying more for your car than if you had taken out a regular auto loan. Add to that the recent rate cuts by the Bank of Canada and the potential for more to come, and a regular auto loan has rarely looked better. Here are some of the reason why 0% financing isn’t as good of a deal as it seems:
Few Qualify for 0% Financing
The first problem with 0% financing is that a large proportion of the population don’t even qualify for it. While it is an extremely effective tactic to get potential customers into the dealership, once they’re there many find that their credit score isn’t good enough. In that case, they’re often offered a loan with a higher interest rate. By that time, however, many customers have fallen in love with a car and want to buy it anyways.
You Have to Buy New
Most dealerships only offer 0% financing on new cars. That means that you can’t save money by buying a car that’s a few years old with low mileage on it. Since used cars can cost significantly less, you’ll have to pay more for a new car just to qualify for the 0% financing option.
No Rebates and No Negotiation
At some dealerships, when you choose the 0% financing option you’re no longer able to get rebates or negotiate the price. That’s because it is seen as one of a few promotional options you can choose from, and many dealerships will only let you choose one option. For example, if you’re buying a $35,000 car and there is a $5,000 rebate available, then you won’t get that rebate if you chose 0% financing. If you run the numbers, like I do below, and compare paying nothing upfront with taking the $5,000 rebate and getting an auto loan that charges a 6% annual rate over a 48-month loan term, you’ll clearly see that getting the 6% financing will actually save you $1,181.60.
| 0% Financing | 6% Financing | |
| Sales Price | $35,000 | $35,000 |
| Rebate | $0 | $5,000 |
| You Pay | $35,000 | $30,000 |
| Cost over 42 months | $35,000 | $33,818.40 |
| Savings | $0 | $1,181.60 |
You Can’t Specify What You Want
Many dealers make their 0% financing option contingent on buying a car currently on the lot. That means that you won’t be able to special order a car with the options you want and you’ll likely have to buy a car that either has more options or fewer options than you want. If you end up buying a car with more options you might be paying significantly more than if you had forgone the offer and ordered your car exactly as you wanted it. On the flip side, if you end up buying a car with fewer options than you wanted, you will have to do without or add them aftermarket.
Borrowing Costs Are Low and Potentially Getting Lower
In July, the Bank of Canada cut interest rates for the second time since January. Their rate is now 0.5%. With the recent slowdown in the economy and financial chaos around the world sending stock markets into a tailspin, many believe that the central bank could cut rates again this year. The Bank of Canada rate affects what banks’ costs of borrowing and they often pass along the savings to customers by lowering their prime rates. Since variable auto loans are linked to the prime rate this means that the costs of an auto loan are extremely low at the moment and will potentially be even lower in the near future making 0% financing even less attractive.
Crunch the Numbers
If you’re wondering if 0% financing is a good deal in your case, you can easily use an online auto loan calculator and plug in the numbers to see if you’ll actually end up saving money by choosing it over any rebates that might be available. If the amounts are fairly close then you’re probably better off choosing the rebate since you get the savings immediately instead of over the full length of the loan. That way, if you decide to pay off your auto loan early you will have still gotten the full rebate.
About the Author: Amanda Reaume
Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.
