Car dealers and motor vendors often have special sales. These sales make way for newer models or aim turning fence-sitters into buyers.
Half the battle is trying to get people into the dealership. Sometimes, car dealers offer their own finance with “reduced” rates. One attractive offer that’s used by dealers is a zero percent car loan.
Zero percent?
“If it seems too good to be true, it probably is,” as the old saying goes. How can a car dealer offer a loan at zero percent interest? If the car dealer is offering zero percent finance from the manufacturer, how are they making a profit?
0% Zero percent car loans are often non-negotiable
In most cases, a new car buyer won't pay the recommended retail price (RRP, sometimes called MSRP or list price) for a new car. They can negotiate a cheaper price with their dealer, or add optional extras for no additional costs.
A new luxury sedan may cost $50,000, for example. With skilful haggling, you may reduce the cost further to $40,000 or even lower in a best case scenario.
When taking up 0% zero percent finance offers, these RRP figures are non-negotiable. If a car is advertised for $50,000, then that is the principal you will pay over the life of the loan.
Your monthly repayments may be higher using manufacturer's zero percent finance instead of negotiating a lower price and arranging your own personal or car loan.
Balloon payments
Some zero percent deals offer an optional balloon payment at the end of the loan. This is a percentage of the purchase price set aside for immediate payment after the loan term has finished. This may reduce your monthly repayments, but you'll still need to fork out up to 30% of the purchase price to pay the car off.
An example
Say the car you've got your eye on costs $52,000. With the 0% zero percent finance option and a loan term of 5 years, your monthly repayment is $833.33.
If you negotiated a fairer price ($40,000) and opted to organise your own finance at 7%, your monthly payment is reduced to $792.04.
You actually save $74.61 each month even though you're repaying a loan with market-rate interest.
In the end, you've saved $4,476.60 over the term of the loan!
Shop around
Shopping around for the best car loan is not only good sense, it will save you money in the long run. Talk to a finance professional to see which car loan product is right for you.