If You Think 0% Financing Sounds Too Good To Be True – You're Right

If You Think 0% Financing Sounds Too Good To Be True ‒ You’re Right

If you’ve been car shopping recently, chances are you’ve seen at least a couple "0% financing" offers plastered on the dealership’s walls and sprawled across their website.

This deal seems pretty appealing, right?

You get to pay the same amount over a period of time rather than all at once, leaving you some cash to fall back on if things get tough.

But have you ever wondered why the dealership is offering this seemingly great deal?

I mean, it’s totally against everything you know about dealerships: They want to make as much money off you as possible without losing your sale.

So what do they get out of 0% financing?

Well that’s simple: more money.

But exactly how they manage this and the options you have for getting the best deal is a little bit more complicated.

First things first: 0% financing isn’t always what it seems

To put it simply, the price they offer when discussing financing options usually has the interest baked into the price.

So for example, they will offer a $20,000 car for $23,000 at "0% financing" and claim this is the lowest price they can get you.

Which, not coincidentally, is the same price you’d pay for a $20,000 car at a 4% interest rate.

A lot of marketing tactics involve twisting words so things sound better than they are.

0% financing sounds way better than 4%, so they’ll claim to give you that while still getting the same amount of money from you. You feel like they’re giving you a good deal, so you’re more likely to take the offer.

When you think about it, it’s pretty manipulative. But it’s definitely not uncommon.

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Ask for any cash discounts

So what can you do to avoid these kinds of tricks?

Always make sure to ask if they have any cash discounts or bonuses available.

Dealerships will often offer thousands of dollars off if you pay in cash upfront, and this is how you can ensure that you’re really paying 0 interest.

For example, Toyota is currently offering financing "from 0%" (0.49% is the lowest I could find on their site) on select models, OR up to $1,500 in “cash incentives.” When you click the fine print, it displays this message:

"Toyota’s special promotional rate is 0.49%. Alternatively, you may choose to take advantage of available Cash Customer Incentives, however, these can not be combined with the special promotional rate."

If you were to finance the car at 0.49%, it would come up to $403.63 total interest paid over the 84 months.

Taking the $1,500 cash offer would leave you $1,900 in the green.

Paying in cash can also help you save on your insurance

Another upside of paying with cash is that you have more freedom to choose how extensive your car insurance coverage is.

When you finance your car, the lenders require full coverage because they have a stake in the vehicle and its payments.

On the other hand, when you pay in cash, you can opt for the minimum amount of insurance possible, which can save you quite a bit of money a month on insurance payments.

Though the bare minimum can save you some money, remember that insurance is important and can make a huge difference in the event of an accident.

Related: Getting The Most Out Of Your New Car Warranty

This all sounds good, but…what if I can’t afford to pay in cash?

I didn’t say to never take a loan out ever.

Get the price they’re offering for financing, and find out if there are any cash discounts available.

Once you have these two numbers, you can figure out your best deal.

Say they offer you the car for $23,000 at 0% interest over 72 months (or 6 years), BUT paying in cash will net you a $3,000 discount.

Shop around for some personal loans with low interest rates and calculate if you’ll still come out on top at the end of the loan.

For example, if you can find a $20,000 loan at a 2.5% interest rate over 6 years, when’s it’s all paid off, you’ll have spent $21,558.24 with interest.

So, if you take out this loan and use the money to pay for your cash in full, by the time you pay off your loan you’ll have saved $1,441.76 off the quote for the financing option.

Save money by shortening your loan period

You can save even more money by taking out a loan for less time. This means that you’ll be paying more per month, but less overall.

Going back to our same example, if you were to take out the same $20,000 loan at a 2.5% interest rate, but this time only for 5 years, the total price with interest will be $21,297.

This means you’ll have saved $1,703 off the financing price the dealership offered you.

Do keep in mind your monthly payments for this loan option would be $354.95, which is $55.53 more than you would pay per month for a 6 year loan, and $35.51 more than you would pay per month if you went with the dealer’s 0% financing offer.

Related: How To Make Your New Car Last Forever

Let’s follow an example so we can understand better

Denise decides she wants to buy a car.

After doing her research and finding the one she wants, she asks how much it’ll be if she decides to finance the payments for 72 months.

The dealer offers her a quote of $416.17 per month for 72 months – at 0% financing!

Denise is excited by the offer, but before she accepts it right away she tells the dealer she’ll think about it and goes home for the day.

At home, she wants to fully understand how much money she’ll have paid for the car at the end of the 72 months, so she calculates the total. It comes up to $30,000.24.

The next day she goes back to the dealership and sees that the person she was dealing with yesterday isn’t there. She’s approached by a new salesperson and starts the process over with them.

This time, however, she decides to ask about cash options, since she was reading some forums last night and people suggested it was a better option.

The dealer explains that as part of a current offer, Denise can receive a $5,000 discount on her car for paying in cash, making it $25,000.

Again, she thanks the dealer and goes home for the day, this time with a different set of numbers to consider.

Time to crunch the numbers

Sitting at her kitchen table, she figures she has 3 options.

The first is the easiest: Go with the dealership’s 0% financing offer of $30,000.

The other 2 options require a bit more work: either taking the cash bonus and getting a low interest loan for the same amount of time as the dealer’s financing offer, OR borrowing the money elsewhere for a shorter loan period.

This is how these scenarios pan out:

  Option 1: Dealer’s 0% financing Option 2: Borrow $25k elsewhere at 4% interest rate Option 3: Same as Option 2 but for a shorter period
Monthly payment: $416.67 $391.13 $460.41
Amount of months: X 72 X 72 X 60
Total: = $30,000.24 = $28,161.36 = 27,624.60

By taking the dealer’s $5,000 cash discount and borrowing money elsewhere, Denise is able to save $1,838.88 to $2,375.64 off the price of the car, all while avoiding spending a huge amount of her own money all at once.

Related: 6 Alternatives To Owning A Car

The bottom line

At the end of the day, you have to do what you’re most comfortable with.

If you don’t trust yourself to be a successful loan shopper, then take the dealer’s 0% financing offer. The price they give you will be what you have to pay (plus taxes & fees), so you’re not in for any surprises.

Just remember to ask about warranty, rust protection, and winter tires.

On the other hand, if you’re a bit strapped for cash or you just really appreciate saving a couple thousand dollars, then consider looking for some better loan options at other places.

Your turn

What do you think? Would you rather take the hassle-free 0% financing offer, or do you prioritize saving money over all else?

What did you do the last time you bought a car? What do you think you’ll do the next time?

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Ken's picture

I will chime in on this, as I have always been told Ive been shafted when I got my truck 6 years ago at 0%, and I never been able to figure out how. When i read and re-read the contract, I never saw anything where Id be paying more for the truck than the day I purchased it. I bought my truck when the Canadian dollar was on par or better than the US. We also bought a camping trailer that year to, since dealers here were getting great deals. Same trailer model now is 15K more.

Anyway, I shopped around for my truck within a 5 hour radius, and got the truck locally for the cheapest price out of the bunch, there was no mark up, in fact there were mark downs to match other dealers prices. I knew the options I wanted, the tow package, the colour. I went in prepared, and I knew the prices of this particular model of truck as I shopped around for months.

I wish someone could show me that I got shafted, because when I ask them to show me, they never can. Maybe people are pissy when someone actually gets a good deal, I dont know. In fact if someone can post some numbers, or explain it to me. Im all ears. Because I took out the loan for 6 years, and after that term, the amount I paid was the same as the price on the invoice out the door.

And before everyone gets their panties in a bunch in Ontario, and say you should never take out car loan for that long, always pay cash, bla bla bla. This truck will be mine for a minimum of ten, if not 15 years. And by the time I saved up to pay for it cash, as the model was a very specific one that isnt made anymore, I would of missed out of 6 years of use of a truck.

Remember, not everyone in Canada lives in an urban setting.

November 14, 2018 @ 11:59 am
Ros's picture


When we got our last car (a Honda Fit, despite living on a dirt road in an equally rural setting) , we tried the same game the article lists - get quotes from different people, ask about cash offers, get quotes from different dealerships, etc. In the end, the 2% financing quote saved about 1K on the cost of the car as compared to any of the other quotes, including the interest. Counter-intuitive as hell, and it definitely shouldn't have worked that way, but there's the joy of doing your own math instead of trusting how it 'should' work. .

November 14, 2018 @ 12:07 pm
HowToSaveMoney Team
HowToSaveMoney Team's picture

Hello Ken,

It's not always the case that you'll get a cash bonus that will make paying in cash worth it. It certainly doesn't seem like that was the case for you, which means you did a great job at shopping around and looking at all your options.

That's what's most important: being aware, informed, and not going with the first quote you're given. I just want people to double check that they're really getting the best deal possible.

And that's exactly what you did. That's great!

Thanks for your comment, Ken. Happy saving!

November 15, 2018 @ 11:50 am
sandra macgregor
sandra macgregor's picture

this may seem like a stupid question-but when you say cash do you literally mean cash- as in bring a stack of 1000s to the dealer? Or would you just bring a certified checque? thanks

November 14, 2018 @ 12:07 pm
Skiddy's picture

Cash means actual cash, certified cheque and even a personal cheque in some cases. The dealership has your DL, address and approval to check your credit rating etc. Some like the no hassle certified cheque route, keeps their night deposit risk free.

November 14, 2018 @ 4:17 pm
Ann Kavanagh
Ann Kavanagh's picture

I always heard if the dealer knows you are paying cash he will not give you a deal...because it is thru financing that they make money.....i am so confused! :)

November 14, 2018 @ 12:42 pm
HowToSaveMoney Team
HowToSaveMoney Team's picture

Hello Ann,

It definitely depends on the dealership, the promotions they're currently running, and probably a lot more factors that are "under the hood" so to speak – things we as non-cardealers wouldn't know about.

But one reason they'd give you a cash bonus is because being paid with cash means they're getting the payment in one big lump sum. They don't have to wait 5 years for the money to come in, it's right there in a couple days.

Thank you for your comment, Ann. Happy saving!

November 15, 2018 @ 11:54 am
John Ukos
John Ukos's picture

"But have you ever wondered why the dealership is offering this seemingly great deal?".....to make a sale?

November 14, 2018 @ 2:47 pm
MN's picture

@Sandra MacGregor: It's always certified cheque or money order, just the same as if you were to leave a deposit on a house.

November 14, 2018 @ 2:57 pm
Skiddy's picture

If you are paying actual cash, you also have to consider what the value of investing and the return on your money is if you select the dealer’s 0% interest option. In the example noted in the article if you took $30K over 6 years, what would be the return of investing it at a 4 or 5% return. Even a no risk 3% return might be worthwhile if you can make the monthly payments.

I have done both, paid cash and used dealer 0% - depends on your circumstance.

November 14, 2018 @ 4:24 pm
HowToSaveMoney Team
HowToSaveMoney Team's picture

Hi Skiddy,

This is fantastic advice, thank you for sharing with us!

And you're right – it definitely depends on your circumstances first and foremost. That's why it's important to run the numbers for yourself and see what works best for you, not the car dealership. :)

November 15, 2018 @ 11:51 am
Jean C
Jean C's picture

We use a five step approach.

First, we visit the dealers we think we might like to deal with based on the products they carry and the reputation we have on them. We can usually limit this to about half a dozen dealers. We rarely do a test drive. We usually look at the ball park prices, look and sit in front and back, move in and out of car, open trunk and hood, look at option lists, colours, listen to salesperson spiel, and so on. It gives us a pretty good idea where we need to focus.

Second, we review brochures, and online sites, car reviews and choose the range of vehicle we need, feel we can afford, like the looks of, car reviews, We usually come up with 3 or 4 options.

Third, we go and test drive in no particular order but we will do at least three of them. We might even test drive the same brand/models at two or more dealers. We get a quote after each test drive for what we would want if that was the car we were to buy.

Fourth, we make a ranking of preferences, Sometimes requires a couple of test drives of the specific model we want. This is important as opinions can change. One year we had two different cars in mind and preferred the "A" bramd but liked some of the things the "B" brand had to offer. When we went back we test drove two different models at two different dealers and ended up buying the "B" brand, The key to finish this step is to arrive at a mutually acceptable decision of which car to buy.

Fifth, I do the price research. Look at sources like Unhaggle Carcost and other price guides on the internet. There is only one of us at the negotiation table and I negotiate and buy on price/value.. We try and deal locally but we will not hesitate to buy outside if it is significant enough. A dealer sometimes can't meet your price but they might offer a special which ends up saving us or giving us something extra which is worth money to us. Once we have got what we want we then go over and sign the deal.

Our last car buying instance which took place a few weeks ago we did the deposit online and we signed all the papers when we took delivery as it was some distance out of our area.

November 14, 2018 @ 6:52 pm
HowToSaveMoney Team
HowToSaveMoney Team's picture

Hello Jean,

Thank you for your detailed comment! There are lots of good tips in here. Looks like you have a great system for buying a car.

November 15, 2018 @ 11:53 am
KB's picture

Just bought a new Ford. Without prompting, my salesperson gave me the cash price and the financing price. Maybe you also need to find a good dealership.

March 19, 2019 @ 4:25 pm

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