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.
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.
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.
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|
|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.
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.
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?