Why Zero Percent might not be the "best deal" for you
Okay, so this has got to be a catchy title. Could be you clicked cause you think "hey, he's gotta be off his rocker!" or maybe your just intrigued by what seems to be my obvious lack of math skills, but I beg you to read further. And I hope it someday helps you to get the best deal possible on a vehicle you love from a place you can trust. I do want to say one thing to the positive about Zero percent deals. If your credit isn't great but you can get approved for a new car through the Manufacturer you might, in fact, be getting a good deal. Once you learn how the numbers are manipulated it will be easier to understand and decide for yourself. Read on...
I always see people rushing in the door when a Zero percent program is running. One manufacturer brings it out and suddenly the race is on for all the other makers to come back with something similar. You go in all excited (Who wouldn't be to pay NO interest on a 5 loan?) only to find out that the price they advertised and the "Zero percent Deal" weren't compatible! Go figure...
Did I lose you? I hope so, cause even when I took the job, the first time I heard of this "Zero Percent Program" I was baffled. I thought it was a hat trick or something. He said "You can have EITHER the 0% for 60 months OR the available rebates." "Why?" I asked. So I had to have it explained with an actual car price and an example or two. Here's how it works, I will use these hypothetical numbers as an example of a bad deal on a New vehicle, and I will also explain how it CAN BE a good deal, for the right situation.
Vehicle X: MSRP $25,000
Discount from dealer $ 2,000
Total price from Dealer $23,000
available Rebate $ 3,000
Financing at XXX bank? $20,000 is your total price. We finance that for you for 60 months at 6% = $386.66/month. With me so far? You should be, you just made a pretty good bargain. The alternative that you wisely refused (after properly doing your research and knowing what suited your needs best)?
Financing from the Manufacturer at no interest.
First negative? You pay $23,000. That's right, you had to chose rate or rebate, but they told you "Don't worry, you financed for 60 months at 0%= $383.41/month. That's 3 dollars a month less! $195 over the life of the loan..." Right? Only technically.. Seems right at the time, but here's ALL the reasons you shouldn't take the Zero interest Deal.
Second Negative? You pay taxes on a sale price of $23,000 instead of $20,000. In my hometown (7.225%) that means you immediately pay $216 more in taxes! Didn't think of that one, did you? There goes that $195 the dealer "saved" you.
I don't like to demonize dealerships, but a good dealer would have weighed that part for you and informed you of the difference. It's ok, most people don't remember; You don't do it everyday like we do.
Now what about all the "What ifs" in life? We never think about those many possible negatives to the deal, here are just a few:
What if it is totalled in 6 months? Or if it's stolen or catches on fire or is otherwise totalled for any reason?
You immediately owe $3,000 dollars more! Zero Interest only saves money over time, you end up with a higher payoff balance. The balance difference doesn't typically weigh back out to even until 3 1/2 years of a 5 year loan (depending upon the optional rate). That's a big gamble!
What if you keep it for three years and decide that you want to trade it for the newer model (had a Kid, need 4x4, just fell in love with that new X model)? Zero interest only saves money over time, allot of things could happen between now and when the loan has saved you $3,000.
What If the numbers are higher? (Escalade instead of G6) Then typically the discount is also commutative. Again a good dealer should be able to weigh this option for you and sum it up with a simple question like "Which of these options is most likely to suit you?" We have fancy machines that pop out real (rather than inflated) numbers for you to consider. What a notion, eh?
Separating the dealers discount from what the manufacturer is offering in rebate is the first step in understanding why zero percent is only a good deal in certain instances.
What instances? There are a few:
Remember when I started throwing around 6% for 60 months? If the best rate you qualify for at the regular banks is 13% then your payment jumps to $455.06! Remember the manufacturer qualified you for 0% at a 60 month payment=$383.41.. That's a savings of almost twice the rebate! Some of those concerns I mentioned are a little more worth the risk then. Also you can "hedge your bets" by buying the inexpensive GAP coverage. But again, it depends highly upon your situation.
You have to ask yourself allot more questions that the salesman will want you to ask, so it's best to understand the math going into it. I cannot tell you how many customers I have completely lost in trying to explain this to them in what they feel is a high pressure situation (because they expect a hat trick) when I could have easily just put them into the 0% and went on hoping that none of these situations happen. Not exactly conducive to my business or my relationship with the customer. Especially if they are standing there telling me "I like to trade every two years.." or "I always owe more on my trade than it's worth! I love to trade up", what can I say?
I can tell you that I am genuinely proud (rather than offended) when a customer comes in with all their research complete and knows what they expect and is reasonable. It gives me even greater pleasure to explain the parts they are unsure about. And there are always parts you will be unsure about, you don't do this for a living, right?
You can see by now that the title to this Blog "Getting the best deal: How 0% can lose you money...." was a tad misleading, but if you have read this far it has done it's job, which is simply to help you see how the programs USUALLY work. Zero Percent deals CAN potentially loose you money, but the numbers need to be examined on a case by case basis. One more reason I advise the same thing I always advise.
"Buy a Vehicle you like at a price you can afford from a dealer you can trust."
There are many facets of this subject that I have not been able to explain or explore here, but I am open to questions and comments as always.
PS(teaser for the next Hub): Then you see dealerships advertising Zero percent on USED cars! What? That one will have to be covered in a different hub, but it does happen and it's a real SHAME! LOL
Links of current Zero Interest examples
- How to Get 0 Percent Financing on a New Car | eHow.com
How to Get 0 Percent Financing on a New Car. Many car manufacturers support their dealerships' efforts to move new car inventory by marketing 0 percent financing on new cars. Lenders generally offer the best credit terms and interest rates...
- Car Incentives - View Current New Car Incentives & Leasing Information at InternetAutoGuide.com
Search for new car incentives by make and model; view current car incentives, finance and car leasing programs, and more at InternetAutoGuide.com
More by this Author
I have decided that fly fishing a pond in an open field is the best way to learn the basics of "fly flinging". this article describes how I, a die hard Spin fisherman, came to this conclusion and put...
If you have an auto loan or are ever planning on getting one, this article could potentially save you thousands, and it's worth a few dollars a month... At least take a look so you know.
This is a guide to trout fishing in the Ozarks. I grew up in the Ozarks and have spent many years fishing for Trout on our local streams (Niangua, Eleven Point, Roubideaux, Current, White rivers and Lake Tanycomo).