How do 0% finance deals work?
It’s a question brokers often encounter. Many car manufacturers have adopted the latest marketing fad of offering 0% finance on their cars, so more often we see the questions being asked, “how does it work?” and, “is it really 0% finance?”
We all know in life you don’t get something for nothing, so when a deal seems to good to be true it really is worth looking into the finer details to understand exactly what is going on.
The first thing to understand is it is a genuine 0% finance being offered, however, due to the time value of money, this means they are losing money on the finance. If the dealership is losing money on the finance, they are making it up in another element of the transaction. The main area they do this is by charging you more for the car than they would if you weren’t taking 0% finance. There is always room for negotiation when you are purchasing a new car, however, you will find there is almost none when they are offering 0% finance.
The next thing to understand with 0% finance deals, is there are often very restrictive terms and conditions attached. 0% finance is usually offered over a shorter term with a residual attached, often something like 3 yr term with a 40-50% residual. Due to a shorter term being applied, the payments can be higher compared with financing over a 5 yr term for example. Also, as there is a residual attached, you will be forced to either pay the residual as a lump sum payment at the end of the finance term, or refinance the amount owing with whatever finance you qualify for at the time. If interest rates increase during your 0% interest period, you could be paying a much higher interest rate on the residual than if you had financed the full amount up front with no residual over a longer term with a fixed interest rate.
According to many dealership business managers, due to the restrictions involved, often when people walk into the dealership to purchase a car and take out 0% finance, they end up opting for a finance package with a standard interest rate applied as the package offers greater flexibility and can be tailored to their individual needs.
Should I get 0% finance for my new car?
When you purchase a new car, and finance through a dealership, because there are several departments involved and several sources through which they are making money off you, it is often hard to understand if you are getting a good deal or not.
If you’ve ever bought a new car before you’ve probably been through this process. You enter the dealership, you’re greeted by a friendly salesman who offers you a vehicle, takes you on a test drive, and when you’ve decided you want to buy the negotiations start. You prepared yourself for this moment so you don’t let yourself be pushed around, and you’re firm when it comes to negotiating your best price. You agree on a price, shake hands, and you think the sale is done there. This is only the start of the sales process for the dealership, because the next person you meet is the aftermarket salesman offering everything you never thought you needed but they’re being very convincing that you do. Paint protection, leather protection, window tint, you’ve just decided to spend all this money on a new car, it almost seems silly to not take up this offer right? Next is the business manager running you through various payment options for your new car and discussing all the various add on insurances such as GAP protection, loan protection, tyre and rim insurance, and extended warranties.
When you focus too heavily on one factor of the transaction, you put yourself at risk of losing out in other areas of the transaction. It is due to this fact that 0% finance campaigns have been a successful marketing tool for dealerships, they target the people that are only rate focused.
The best indicator of the deal that you’re getting is your bottom line. Compare apples with apples and rather than focusing on the price of the car, or the interest rate on the finance, focus on your monthly repayment including everything or your total cost of loan.
Your best source for a comparison is to go through a vehicle and finance broker. A broker will source the best finance package to meet your individual needs from a broad portfolio of sources, similarly on the vehicle side, they will source the best price for your car by negotiating with a range of fleet managers. Due to the high volume that brokers deal with, and as they aren’t attaining the vehicle with 0% finance, they will be able to source the same vehicle at a much lower cost than what the average consumer can attain especially when taking out 0% finance. In the majority of circumstances, the repayments on the finance through your broker will be much lower than the dealership’s repayments on the same car with their “unbeatable” 0% finance offer.