The Truth About Zero-Percent Car Financing

What does zero percent car financing really cost? Car dealers have been very successful with their zero
percent financing campaigns - so successful that the concept has been repeated in other industries such as
electronics, furniture sales and credit card companies.

According to CNW Research, only one-third of buyers who apply for zero percent auto financing actually
qualify and only 10% of those deals actually close according to the National Automobile Dealers Association.
CNW Research goes on to state that many zero percent car financing qualifiers overpay for their car, since
they assume they're getting the best deal available and they fail to negotiate the price. Automotive
manufacturers use their own financing companies to underwrite these zero percent car financing deals, each
of which have their own credit qualifications. Generally speaking an applicant must have close to perfect
credit to qualify for zero percent financing.

If you have been one of the fortunate ones that didn't get lured in with the zero percent offers only to get
switched to a higher rate because of "blemishes" on your credit and the dealer is now offering you that "free"
money, here are some drawbacks you should be aware of before signing that deal.

• Shorter Loan Terms. 36 months is average which means your monthly payments will be much
higher.

• Limited Inventory. The zero percent financing offers are generally reserved for models that are
suffer from low sales and is not offered on any pre-owned inventory.

• Cash Back. Have you every noticed the "or" clause in those zero percent car financing
advertisements? You may have seen ads stating "0% or $10,000 cash back" That $10,000 you lose
by opting for the zero percent financing is the actual cost of borrowing. This often equates to an
interest rate much higher than a traditional car loan.

Adding up the Numbers

A recent search of the website of one of the Big 3 automakers shows an offer of zero-percent
financing on a 2008 mid size sedan. This is how the numbers work out.

Annual Percentage Rate 0% 6.95% (New Car)

Cost of Car $29,999 $29,999
Less Rebate $0 $5000
Amount to Finance $29,999 $24,988
Monthly Payment $625 $596
Total Cost $29,999 $28,608
Savings $0 $1,391

Based on 48 months. Does not include taxes, administration or other fees dealer may charge.

This comparison doesn't take into account the fact that you are forced to purchase a new vehicle.
Let's take a look at the same vehicle, same model year with approximately 10,000 km on it that
was found by doing a quick search on the Internet.

Annual Percentage Rate 0% 6.95% (Used Car)

Cost of Car $29,999 $19,999
Less Rebate $0 N/A
Amount to Finance $29,999 $19,999
Monthly Payment $625 $478
Total Cost $29,999 $22,944
Savings $0 $7,055

By financing at a low rate and choosing a slightly used car, a consumer would save over $7000 in
this instance.