Zero Percent Auto Financing: Does it Exist?

Zero percent auto financing sounds like a “too good to be true” deal, and for many prospective new car buyers it is. Zero percent auto financing does exist if you have great credit. If not, watch out for hidden costs that turn what appears to a great deal into a bad deal for you.

When Your Credit Is Great

Auto dealers often advertise zero percent auto financing, and the ability to offer that deal comes from special incentives through the financing arm of one of the auto manufacturers the dealer represents.

But zero percent auto financing will only be a reality if you qualify, and only buyers with great credit will. Additionally, you will likely be offered short payout terms, an example would be three years. In that scenario, for a $30,000 car with 20 percent down, your monthly payment would be $667 dollars.

Full Loan vs. Introductory Rate

What is far more common than the true zero percent auto financing loan is a zero percent introductory rate, which is also called a “teaser rate.”

Low- or no-interest introductory rate auto loans are similar to an adjustable rate mortgage on a home. For a predetermined number of months, ranging from three to 12, you pay no interest on the loan. At the end of the loan period, the interest rate automatically rises to an agreed rate. This second rate often is above market and high enough for the lender to make back losses from the intro rate.

Payments can be structured to stay uniform through at the loan, or to be low during the introductory period and rise with the new rate.

Zero Does Not Mean Free

Whether it is a true zero percent auto financing loan or a low introductory rate, “zero” does not mean free when it comes to buying a new car.

If your auto dealer is your lender, look out for fees or penalties on the loan itself. Typical is a late-payment penalty that adds dollars to your loan balance and immediately changes the interest rate to an above-market amount, even for one late pay.

Getting Less than Zero

Often, the dealer recoups the cost of zero percent auto financing in the price of the car. The same is true of cash back and no down payment offers. If you are car shopping when the dealer needs to sell, the end of the month or the end of the model year, you’re in a better position to negotiate on car price and get your zero percent auto financing in the bargain.

Bait and Switch

While zero percent auto financing does exits, it often is a form of bait and switch, in which the prospective buyer is offered one deal to get him in the dealership but told he does not qualify or the offer is not available. The buyer is then  switched to a new offer.

When you see offers of zero percent auto financing, but you have less than excellent credit, know going in it is unlikely you will qualify for it.


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