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Why 0% Interest Rate Auto Loans are Usually Not a Good Deal

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If you’re like me, you love a great deal. You feel really smart when you think you are getting a better deal than your sister, your best friend, or your office buddy. But sometimes you really have to read between the lines to make sure you are getting the best deal.

Have you ever come upon an offer that says, “Zero percent financing?” It may sound like the best deal ever, but let’s take a look at what this means. Is this real?

Only 5% qualify

First of all, only about 5% of people who apply for this kind of deal qualify for it. You need an excellent credit rating (around 750) and a high income to qualify. In fact, it could easily be concluded that the people who qualify for these types of loans don’t really need zero percent financing! How ironic.

Why don’t they offer it to the people who need it most, like folks who are trying to save money over the long term of a loan? Because they can. It draws a crowd. It sells cars.

Unlike “no money down” contracts where you pay no upfront cash for a vehicle, zero down financing means you do not pay any interest, at least in theory. Sounds good, doesn’t it? But what’s the catch?

Zero Percent Is Not Really Zero Percent

A typical zero percent financing deal is only a 0% financing deal for those with impeccable credit ratings and high incomes. The majority of people who go in and apply for these deals do not qualify for them. But, once you’re in there, the dealer or lender will work around another alternate deal for you that allows you to purchase a car. It may be 3%. It may be 9%. But it is definitely not usually 0%.

Additionally, these people may be paying $6,000 down for their car as well in order to avoid the interest. It might be worth asking someone who has qualified for these deals to see how it really worked.

To quote from Hamlet, “Aye, Mother, I know not seems. Aye, but it is!” Hamlet was referring to the fact that things are not often what they seem and that what it “is” is all that matters. No truer statement was ever made and it applies to today as much as it did back then.

The Emotional Factor

Did you know that studies have shown that most people make a purchasing decision based on their limbic brain system in the back of their brain? Why is this important? The limbic system is that part of your brain that functions as the emotional center of your brain. It is not the logical brain that asks, “Do I really need this?” or “Is this the best purchasing choice?” Instead, it says, “I’ve never seen such a beautiful red color on that sports car,” or “I deserve to have this!”

Only later, when they have signed the paperwork and made the deal and bills start coming in, do they realize that they may not have gotten the best deal for their money. But because they were already emotionally connected to a certain vehicle, they sign the contract thinking, “I’ll come up with the extra money later.”

Another fact that dealers use to close the deal is the idea that, once you have invested so much time and paperwork into a car deal, you are probably not going to walk away from it. But the fact is, you have the right to do just that!

You do not own a car dealership anything (until you buy a car, of course)! So think through it carefully and ask plenty of questions so that you will know what the math adds up to.

How can auto dealers afford 0% interest deals?

The fact is, they can’t. They know that only a few people will qualify for such deals and these people are the ones they don’t have to worry about. The lower credit score crowd (which are many of us who read this blog), will not ever see the 0% deals because dealerships won’t offer them to us!

This is how car companies and banks stay solvent and keep from losing their shirt over defaulted car loans. Just like a bank, they decide who is the biggest risk and those people pay higher interest rates. That way, the companies will still get a lot of the interest payments from the buyer at least for the first few months, even if the car ends up being repossessed.

Finding the Best Deal

So now you know. Most 0% interest deals are a bit of a trick. They know only a few people will qualify. They are not offering the deal to everyone, even though it sounds like they are.

Since this kind of deal is probably not worth the time of applying only to be rejected, where do you find the best auto loan deal?

The best kind of car deal is one where you pay a reasonable interest rate for a reasonable amount of time to pay it off. If you go too long, the interest will add up too much. If you go too short on the time, your payments will be too high. Opt instead for a middle-of-the-road arrangement that gives you a fair interest rate for your credit rating, using the car payments you make to increase your credit score.

Over time, your credit score will improve and you may be offered a better deal next time.

It’s important to do the math and find out what you are really paying by adding the old Interest formula (principle x rate x time). This is the only way you’ll know just what you are putting out in finance charges and how much you are really paying for a car.

Let’s take a simple example. Let’s say you buy a ring for $100. You purchase it on a credit card that charges 21% interest. The real amount you are paying is $121, not $100. See how this works? With a car, which costs much more than a dinner ring, you’d be surprised at how the interest racks up.

However, this is the reason a lot of people go for the 0% interest deals. They think they are avoiding interest by doing this. But again, you probably won’t qualify for this deal so you’ll end up paying 3%, 5%, or even 15%. Read the fine print and do the math.

Don’t Get Distracted

Remember what we often say: “If a deal sounds too good to be true, it probably is.” Look at the details before you sign a contract and ask questions. It is the car dealer’s job to listen to you and answer your questions truthfully. The definition of “fraud” is representing a product or a price in a way that is untruthful. They are obligated by law to tell you the truth if you ask.

Ask about the interest rate, whether it is a variable or fixed interest rate. Ask about the condition of the vehicle you are considering purchasing. Ask about the history of the vehicle. Ask anything you want to know and more.

Most car dealerships don’t lie. They just subtly leave out the details hoping you won’t notice.

Car dealerships tend to make this kind of deal seem so appealing. We hear them everywhere, don’t we?

  • “No money down”
  • “No interest!”
  • “No payment til August!”

Yes, they sound great because we know it means we could literally drive away with a car today without having to wait to save up for a down payment. We think we can outsmart the system and get zero interest on a car. But do you really believe car companies can afford to do this? No. They’d be out of business in a month if they actually did it for everyone.

So try to calm your excitement and limbic brain system for a few minutes and think through this. Buying a car is an important step. It costs a lot of money. This is no small ticket item.

The appeal is the immediacy of having a car right now. But isn’t it better to get the best deal? If you take the time to deal with a legitimate dealer who can connect you with a large number of lenders, wouldn’t that be better?

What if I told you that we just don’t do that! We are not on the radio yelling, “No Money Down!” You won’t hear us blaring from a megaphone high above a car dealership, “Zero interest!” “Drive home today!”

Instead, you’ll get a listening ear, someone who wants to understand your financial situations and budgeting needs, and someone who cares enough to find a tailored solution for you. Apply today and avoid unnecessary stress!

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