It's a rule that seems so obvious it’s probably even in Donald Trump's best-selling Art of the Deal, if you like books with small words: "anything that sounds too good to be true, almost certainly is".
So if you've seen an advertisem*nt promising “0% interest”, “0% car finance”, or even the slightly less-generous sounding “1% finance car deals”, immediately grab your reading glasses and prepare to start scouring the fine print, because there’s more to most new car finance deals than meets the eye.
The simple and should be obvious fact is that 0% finance new cars can actually be more expensive to buy than the same car bought with a standard finance interest rate. That might sound counterintuitive to you, and if it does, you really need to read on.
When you see an offer like “0% financing”, it sounds like a hell of a deal, but that's what car finance deals are designed to sound like. Basically it's all about getting you into the showroom.
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What you need to look at is the bottom line, and the math here is fairly simple. If you can buy a car with a normal finance deal, at say 8.0 per cent, for $19,990, that's still going to be cheaper than buying one at a 0 per cent if that same car costs $24,990 under your "special" 0 per cent deal.
Because this is what car companies will sometimes do, basically as a way of recouping the cost of offering you “0% finance”, for example. They give you the low rate, but bump up the price of the car, or add on extra fees, delivery costs and charges. Again, it's all about reading the fine print.
Using the above theoretical example, we used a website to calculate that the total repayments, at 8 per cent, would be lower than the 0 per cent, too-good-to-be-true deal.
At 8 per cent, a $19,990 car over three years would require repayments of $624 per month, and mean you end up paying $22,449 for the vehicle after three years.
But the $24,990 price, paid back over three years with 0 per cent interest, still adds up to $694 a month, or an extra $2541 in total.
"Many car companies use low-finance offers to get customers into showrooms, but in most cases the deals are tied to the full price of the car and full dealer-delivery charges," a veteran car dealership finance expert explains.
"That's the only way car companies can afford to offer the low interest rates. They get their money eventually. You don't get nothing for nothing."
What should you do when shopping for the best finance deal?
Finance experts advise that what you really need to do is compare and contrast the deals on offer, and don't be sucked in by simple sells like “0% financing”.
Demand to know the total repayment figure on that 0 per cent, and what the total purchase price will be, including all fees. And then compare that price with what you can get from an outside finance company - your bank, or some other lender - and how cheaply you can get the same car if you bring your own finance (or, if at all possible, pay cash, which will usually drive down the price significantly).
Always be sure to ask about the balloon payment at the end of any finance deal, as well, because therein can lie hidden traps.
The clever thing to do, of course, is to negotiate, because if you can get your dealer to tie their 0% financing deal to a cheap drive-away price, then you are genuinely winning on both sides of the ledger.
You'll need a dealer to be quite keen to shift that particular model, of course, but remember there's never any harm in asking. And you should always be willing to walk away, and go and ask another dealer the same question.
And always shop around for finance. Deals as low as 2.9 per cent are quite common at the moment, and historically that is a very good rate indeed. And if you're willing to take your chances, and drive a hard bargain, on 0 per cent finance, there are plenty of car companies that will attempt to accommodate you.
In 2021, it’s becoming far less common to see dealerships trumpet that they have a “0 per cent car finance” deal, possibly because consumers have started to cotton on to the ruse.
What’s far more common is to find a ‘finance calculator’ featuring sliding scales on a car brand’s website - this allows you to set what interest you want to pay, over what period you want to pay off the loan and what amount (if any) you’ll pay as a lump sum at the end of the term.
This may make you feel like they’re in the driver’s seat, as it were, with the freedom to set the terms and conditions of the loan to their personal requirements, but the same caveats apply: the lower the interest rate, the higher you’ll pay back over time; and additional costs may get snuck in along the way (common things to see among terms and conditions are the car manufacturer having ‘the right to change, extend or withdraw an offer at any time’ and the good old ‘fees and charges apply’, so proceed with caution).
You can use websites to find the best deals, or just Google your favourite brand and the price you're after.
How to drive a bargain
- Ask how much the total repayments will be over the life of the loan, regardless of the interest rate they're offering.
- Always compare the offer in the dealership with those available outside, because sometimes a dealer will have a better deal, and sometimes it will be banks and other lenders who are cheaper.
- Ask if the low finance rate is attached to the price of the car, or if the price of the car negotiable as well.
- Check the length of the loan. Many low interest rate offers are only available over three years, and the monthly repayments may be higher than a regular interest rate over a longer-term loan.
