If you've watched much television lately, you've likely seen back-to-back car commercials touting zero percent financing. As carmakers compete to sell vehicles, nearly all are resorting to "no cost" financing.
Zero percent financing offers often draw consumers to new car showrooms, but the results aren't always advantageous for buyers.
"On the surface, zero percent financing can sound like a no-brainer," said Ethan Ewing, president of Bills.com, a financial advice Web site. "However, consumers must understand that zero percent financing is intended to generate foot traffic for dealers as a bait and switch tactic, and that it is sometimes not as rewarding as alternative incentive offers."
In many cases, zero percent financing can present tremendous opportunities to potential car buyers. However, consumers should first do their homework to ensure that it is actually the bargain it is marketed as by dealers and car companies.
Some things to consider:
• Remember that all dealer incentives are designed to generate car sales. The ultimate goal is to bring consumers into the showroom.
• Zero percent financing is predicated on good credit. Normally, only the best credit customers will qualify for this promotion. If you are purchasing because of the promotion, check your credit score ahead of time so you can know whether to even step foot into the showroom.
• Most zero percent financing offers come with a relatively short payback term, which can make for higher overall payments. For families on a monthly budget, it might make more sense to avoid the promotion and opt for a longer-term payback so monthly payments are lower.
• Most zero percent financing offers are only available on a limited number and type of models. Car buyers should research which automobiles are being offered as part of the promotion before visiting the showroom.
• Be wary of automobile prices that are elevated to compensate for low interest rate offers. Negotiate the price of the car independently from the loan terms. By packaging your new car price, any trade-in and your loan terms as one deal, you stand to lose money.
• Finally, explore competing promotions such as cash back offers. Sometimes, the case for a cash back award might be more compelling in the long run.
For example, the monthly payment on a $28,000 vehicle at zero percent interest over 48 months is $583.33. This compares to a $572.52 monthly payment for the same vehicle with a $3,500 cash back offer and a six percent interest rate over 48 months (not including tax and title fees). Do your research carefully and compare all offers.
"Car buyers should arrive at the dealership as well-armed as possible, with an auto in mind, a set price range, and some idea of your creditworthiness," continued Ewing. "Without this information you are at a great disadvantage."