Zero interest for a year! Zero down! Zero payments for six months! Sound familiar? Unless you live in an ad-free bubble, you’ve likely encountered these auto financing offers on TV, the internet, the radio and everywhere in between. But is zero really all it’s cracked up to be?
Of course, it feels great to think we’re getting a great deal and it feels even better to believe we’re getting something for nothing. But pouncing on seemingly awesome deals can sometimes lead to unintended consequences, so let’s take a moment to unpack the reasons we recommend approaching zero with caution when buying a car.
Few qualify for zero percent financing
Offers for zero percent financing pique your interest and get you in the door. But when putting pen to paper, many consumers won’t qualify since that rate is reserved for those with stellar credit scores.
If you discover that you don’t qualify for zero percent financing after test driving and falling in love with a particular car, you may be presented with a less attractive counter offer at a higher rate. At this stage in your purchase, you may struggle to walk away from the sale and end up with a not-so-stellar deal.
Zero percent financing often requires a short-term with high payments
A short-term with a high payment can be a good thing if it fits within your budget comfortably. However, it isn’t realistic for many consumers. Sure, you’ll potentially save money by not paying interest on your car purchase. But if a required shorter term and higher payments don’t mesh with your current budget, is it worth setting your finances on a ledge until your term is up?
FAIRWINDS Quick Tip
Auto insurance only covers the value of your car after a total-loss accident, meaning it won’t cover the full amount owed on your loan if you’re upside-down. GAP insurance protects you further by covering the difference between the car’s value and what you owe.
Zero percent financing offers can shut the door on incentives and price negotiations
Zero percent financing comes at a cost to the dealership so they may be less willing to negotiate a lower price on the car. Plus, it may disqualify your purchase for other offers such as cash incentives. Why would it matter if you’re saving money on interest? That depends on a lot of variables, but you may find that getting zero percent financing isn’t the thriftier option after digging deeper.
For example: On a $25,000 car loan lasting 36 months with zero percent interest, your payment will be $694. But if you pay a 1.9 percent interest rate and take a $2,500 cash rebate*, you’ll borrow $22,500 instead and you may have the flexibility to increase your term to 48 months — lowering your monthly payment to $487. While you’ll pay $884 in interest, you’ll still end up paying $1,616 less for that car because of the incentive. Want to crunch the numbers yourself? You can use our Rate vs. Rebate calculator to determine the best solution for you.
Putting nothing down also puts you upside-down
When you drive off the lot in a new car, your car depreciates in value immediately. By not paying at least a 10-20 percent down payment, you’re immediately putting yourself upside-down on your loan — meaning you owe more than the car is worth from day one. This can make it hard to resell or refinance your car in the near future.
We recommend saving up for a down payment first when buying a car. Your patience could be rewarded with an all-around better deal because a down payment could strengthen your leverage at the negotiating table, open up access to a better rate and shorten your term.
Taxes and fees will be financed when you put zero down
If you don’t put down a dime, the additional costs of your auto purchase — taxes, tag, title, etc. — will be tacked on to the purchase price of your car, increasing the total you’re financing. At a minimum, we recommend having enough on hand to pay for taxes and fees with cash so you’re not paying interest on taxes.
Zero payments means being free from payments, not interest
Getting an introductory break on payments for your new car feels great. Why wouldn’t it? After all, you’re driving around in your new ride without having to spring for payments each month (yet). But you may still accrue interest during that time.
To make the most of your payment-free window, we recommend either getting ahead of the game by making payments to your lender anyway or paying yourself each month by putting the payment into an emergency savings account — giving you a nice cushion should your monthly budget fall short or your car needs repairs down the road.
If you’re thinking about financing a new or a used car and would like some guidance on the loan process and navigating dealer offers, let's steer you in the right direction to make your next car purchase a success.
*Totals are for illustrative purposes only and may not reflect actual incentives or interest rates available.