Zero Percent Financing – A Consumer Benefit Or a Marketing Trick?

Posted by Credit Financing Guru on 31st May 2010

In recent years, zero percent financing has become an increasingly popular financing option offered by most car manufacturers on new cars and trucks. While it does sound great and is extremely appealing to many car buyers, there are few things attached to it that may diminish the benefits.

Commonly, car dealers offer an alternative of a zero percent financing or a cash rebate on the vehicle purchase price. Let us say, that you are confronted with an offer of getting a cash rebate of $3,000 or a zero percent financing. While you are going to have no interest to pay, you will end up paying $3,000 more for a vehicle that you may have saved otherwise. Should you pay off your loan early, the advantage of taking zero percent financing would become null.

It is important to keep in mind that any car is a quickly depreciating asset. Taking a rebate instead of a zero percent financing incentive may help you to reduce the gap between the loan balance and the vehicle fair market value. Since your car depreciates most in the first year of use, having it totaled or stolen may leave you upside down on your zero percent auto loan since your insurance company would not cover extra $3,000 you paid for your vehicle. That means that you would have to come up with the difference to cover the remaining loan balance.

It is important to remember that nothing is truly free in this life. Financing incentives, typically coming from the corporate offices of car manufacturers, are most commonly hidden in the vehicle selling price. Car dealers, sometimes offering zero percent financing on their own, follow the same strategy.

How Does It Work?

While it is somewhat understandable how financing incentives offered by auto manufacturers work, zero percent financing offered solely by a dealer may raise your eyebrows. Obviously, banks are not going to finance you at no interest, no matter how good your credit is, since they have to make money off you to stay in business.

What usually happens is that auto dealers rebate the bank upfront for the interest charges that a customer would accrue and pay to the bank otherwise. In simple terms, your dealer pays your interest for you. Since they are not going to make it a money-losing proposition, they have to compensate these expenses somehow. That is why these costs are built into the vehicle purchase price.

Typically they are offset by a rebate that a car manufacturer would give you on a new car purchase and/or an incentive that an automaker gives a dealer for higher volume sales. What this also means to you that there is less negotiation power on your side, since a dealer would be less eager to go down on a vehicle price in this case.

Financing Incentive or a Cash Rebate?

What this means to you is that a simple mathematical equation needs to be solved. When approached with a choice between the rebate and a zero percent financing, calculate how much interest you would normally pay on a car loan and compare it to the amount of rebate. If your interest charges are going to be greater, it may be time to consider zero percent financing. Should they be not, take the rebate and run away from the zero interest deal!

Mary Wise is a personal loan consultant who has been associated with Bad Credit Loans and has more than thirty years of experience in finances. She has helped a lot of people to obtain Fast Unsecured Loans, and many other products regardless of their credit situation. If you want to learn more about Personal Loans you can visit her at

Zero Percent Financing FAQ:

Question: Is it better to take the zero percent financing or the cash rebate on a car loan and pay the interest rate?
My payments will be less with the zero percent on a 60 month loan, only by $22

Answer: Financed cars is more expensive to insurance cause it requires full coverage. If you plan to pay the car off early, like many people do, take the cash rebate.

Question: Should I use low financing or home equity to buy a car?
I could probably get low or even zero interest on a car loan or use my home equity at 4 percent.

Answer: With home values falling these days, I wouldn’t use home equity, or you’ll be upside down on your mortgage like most of us. Get the car loan at low interest, check credit unions, they are typically better than dealerships.

Question: Zero percent financing good for buying car?
I’m very skeptical on these zero percent financing. I say the interest is built into the price. Any thoughts?

Answer: They are only offered to those with stellar credit, a rating of 720 or better, and are for a limited time. You might have zero percent for the first year for example.

Question: What is zero percent financing?
I’m not a expert on interest rates but I’m in the market for a vehicle and I keep hearing zero percent financing at dealerships. Is it a good thing or will it end up screwing you over in the long run?

Answer: In most cases, the “no interest financing’ is offered in lieu of a substantial cash rebate at the time of purchase. Read the proffered agreement very carefully. While I do not have experience with such arrangements, I have heard horror stories about your ‘zero interest’ disappearing if you are so much as late on ONE payment. Check ALL the fine print before you sign.

Question: Are there any hidden charges with zero percent auto financing?
We are in the market for a new car, and would like to wait until at least September or October, when the dealers will be trying to clear their showrooms/lots of old models. We’d like to take advantage of any zero percent financing offers available, so I’d like to hear from someone who has experience with these offers.

Answer: I bought a 2006 Chevy Cobalt over the 4th of July weekend in 2006. I took advantage of the 0% financing for 72 mos. It was straightforward and there were no surprises or hidden fees. My monthly payment was the price of the car, divided by 72 mos. Just because you are getting 0% financing, don’t think you have to pay MSRP. They will try to pull this crap on you, but it’s crap. Do you have a system for figuring out how much to pay for a car? You really need to have your ducks in order. I recently got a deal accepted for a GMC Sierra which I ultimately changed my mind on. But it was also a 0% financing deal for 72 mos, and they agreed to sell it to me for invoice (invoice is what the dealer pays for the car, as you probably know) in addition to the 72 mos 0%. I don’t know why you would wait til Sept or Oct, there might not be 0% financing during that period. 0% financing seems to be a summer promotion, mostly. Plus you won’t have the availability in the fall that you have right now. (smaller selection, that is).

Question: Who’s offering zero percent financing on new cars?

Answer: Go directly to the dealers web site and the deals will be advertised. Example,… and so on. The bad news is unfortunately most people do not qualify for the Zero percent interest unless you have an absolute perfect credit rating, then it seems they can also come up with something to not be able to offer the Zero Percent. Beware and good luck!

Question: What is zero percent financing? is this a good way to get a car?

Answer: You would have to run the numbers and compare the zero percent loan against an interest rate car loan to see which is better if the choice is between a zero percent loan and cash back. The cash back is better in virtually every case.

Question: What can I do to buy a Chevrolet suburban 2010 at a good deal?
I am in the market to buy a suburban 2010 texas edition. I have a down payment of 5k and I want to finance the rest. I know the MSRP is around 41k and the invoice price is 38k but I want a lower price and zero percent financing for 5 years AND new car. If anyone has good tips please do let me know.

Answer: Are you aware that invoice does not represent what the dealer pays for the car? Dealers will be happy to sell you a vehicle at invoice. You can only get 0% financing when it is being offered by the factory. If that offer is on the table the dealer must participate which raises the cost or cuts into the profit.

Categories: Auto Financing