The Zero-Percent Financing Scam

Does 0% Financing Save You Money on a Car?

Instructions

In the first field, enter in the cost of the car without a rebate.
In the second field, enter the cost of the car after the rebate.
In the third field, enter the number of years for the loan's term.
In the fourth field, enter the reduced financing rate offered if you decline the rebate. This should be a number for the annual percentage rate.
In the fifth field, enter an alternate financing rate available if you accept the rebate. This should be a number for the annual percentage rate.
Click the "Compute" button and you will see: the monthly payment for financing the entire cost at the reduced rate, the monthly payment for financing the cost after the rebate at the alternate rate, and the difference between the two options. If the difference is negative you should take the rebate and use the alternate financing method.

The Zero-Percent Financing Scam

Automobile companies have discovered that 0% financing promotions are one of their most effective sales tools. Print ads and television commercials abound with offers of “0% APR” on new models. The idea is to attract buyers for new cars by making it appear that compared to used cars, they will save money on financing. However, almost all 0% financing offers provide multiple options for the consumer. The ads usually read something like “0% financing for three years or a specified amount of cash back.” The amount of cash back depends on the model, with expensive models receiving larger rebates. Further inquiries reveal that if you desire a longer loan, that option is also available for a reduced interest rate of 1% or 2%. Which option is best for you as an automobile buyer? Should you (a) take the cash back, (b) take the 0% offer, or (c) take the longer-term loan at a reduced interest rate.
The answer of course is—it depends. But before we analyze the situation to determine what your choice depends on, let us immediately dispense with the 0% financing myth. If you are considering a car with a $15,000 price tag and are told that you will get $2,000 back if you pay cash, that car costs $13,000. If you are told that the car cost $15,000 and instead of the cash back they will finance it at 0% for three years, the car still costs $13,000 and you are being asked to pay a $2000 financing charge up front.

Car dealerships go through an elaborate charade to make the car appear to cost $15,000, but the bottom line is once all the money has changed hands, the net cost to you is $13,000. Before agreeing to a 0% financing deal shop around for alternate financing. Use the calculator on the left to compare monthly payments. Suppose you can finance the $13,000 cash price at 7% with a loan from your bank. The calculator will compare the monthly payments resulting from the reduced financing charge of 0% for $15,000 with the payments resulting from the alternate finance charge of 7% for the $13,000. In this example, if the loan is 3 years the payments per month on the 7% loan are $401 compared to $416 for the 0% loan. It costs $15 extra per month over three years for the 0% financing.

Joseph Ganem is author of the award-winning book: The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy. Hear him talk about the book below.