qualify

Are 0% car loans too good to be true? How to know



Sharing buttons:

0% financing for buying a new car too

good to be true the short answer is

usually yes whenever you see an ad

offering 0% financing for 72 months or

whatever the first thing you'll want to

look for is whether there is a cash

discount offer that you can't get if you

opt for the 0% financing for example an

ad might say 0% financing for 72 months

or $5,000 cash purchase discount that

big fat or should get your spidey sense

tingling that means you have to pick

either the 0% financing or the big fat

discount for paying in cash but you

can't get both and bear with me if you

don't have the cash to buy outright

that's actually the key to this whole

analysis let's break down both options

suppose the car we're looking at has a

regular price of $25,000 if we were to

get a $25,000 loan at a 0% interest rate

for 72 months we would have a payment of

three hundred and forty-seven dollars

and 22 cents per month and of course the

total amount of money paid over those 72

months would be $25,000 because we

haven't paid interest but if we decided

to take the $5,000 discount for paying

in cash up front we would take the

$25,000 price and subtract the cash

purchase discount of $5,000 to get

$20,000 now yes most people at this

point would say great but I don't have

$25,000 let alone $20,000 and I need to

finance the car as an aside my first

response to this would be to say well

you should be looking at a cheaper car

because I don't think people should

finance depreciating assets but some

people think that's just crazy talk so

I'll leave that for another video for

another time so back to our conundrum we

can get 0% financing over 72 months or

we can get a $5,000 discount for paying

in cash but not both so here is the key

part to this whole analysis the thing

you have to consider is that you can get

the $5,000 cash purchase discount so

long as you give the dealer $20,000 in

- and you could get that $20,000 in cash

if you got a $20,000 loan from somewhere

else but the question is when would this

makes sense and the answer is if the

cost of financing that $20,000 is less

than $5,000 in this case okay let's

break this down to make it clear to

start remember that with our dealers 0%

financing offer we can finance $25,000

from the car dealer at 0% interest over

72 months and that gives us a monthly

payment of three hundred and forty seven

dollars and twenty two cents but if we

get a loan from somewhere else for

twenty thousand dollars we first want to

solve for the interest rate that over

the same 72 months will give us a

monthly payment of three hundred and

forty-seven dollars and 22 cents using a

financial calculator we solve for the

interest rate and find that number to be

seven point six four percent so what

this means is that if we can find a

lender somewhere else who is willing to

lend us $20,000 over seventy two months

with an interest rate less than seven

point six four percent will have a lower

monthly payment and our total principal

and interest paid out over this time

will be less than $25,000 interest rates

are pretty low these days so let's say

we find a lender willing to offer a four

percent interest rate if we still wanted

to pay the twenty thousand dollar loan

at four percent interest over seventy

two months our monthly payment required

will be three hundred and twelve dollars

and ninety cents that's a full thirty

four dollars and 32 cents less per month

every month for those seventy two months

our total outlay principal and interest

over the seventy two months is twenty

two thousand five hundred twenty eight

dollars and eighty cents so we've just

seen that it's possible for a four

percent loan to end up costing us less

out of pocket than a 0% loan in this

case and in this case we've saved just

under twenty five hundred dollars over

the 0% financing offer

another way we could use this

information is to keep the monthly

payments the same and see how much

shorter the overall loan would be so

again if our starting loan balance is

$20,000 our interest rate we were able

to find was 4% and we set our monthly

payment to three hundred and forty seven

dollars and 22 cents per month we want

to solve for how many months the loan

would be using our trusty financial

calculator again we find this to be just

a hair over sixty four months in other

words we could shorten our loan by eight

months our total principal and interest

paid is twenty two thousand two hundred

forty-four dollars and 64 cents

so to recap at this point we have three

scenarios using this particular example

scenario number one take the zero

percent financing offer from the dealer

you pay three hundred and forty seven

dollars and twenty two cents per month

for seventy two months total outlay

twenty five thousand dollars scenario

number two borrow twenty thousand

dollars elsewhere and get four percent

financing pay three hundred twelve

dollars and ninety cents per month for

seventy two months total outlay twenty

two thousand five hundred twenty eight

dollars and eighty cents and scenario

number three borrow twenty thousand

dollars elsewhere but instead of

decreasing the monthly payment decreased

the length of the loan so the monthly

payments are the same as in scenario one

at three hundred and forty seven dollars

and twenty two cents per month but that

pays off the loan in only sixty four

months total outlay twenty two thousand

two hundred forty four dollars and 64

cents if your goal is to pay the lowest

total amount overall and I think we can

all agree that that's probably the goal

the zero percent financing is the worst

option out of three in this particular

example so if you want to do the

analysis on a specific deal the two main

variables you'll need are the cash

purchase discount amount and the rate of

interest on getting financing elsewhere

you don't need to necessarily worry

about solving for the interest rate like

we did if you're not a fan of math or

financial calculators you can just see

what the best rate of interest is

available from another lender and use

auto loan calculator on the web to

figure out your total outlay and if it's

cheaper overall it'll make sense to skip

the 0% financing and find your own

financing somewhere else but wait

there's more to this story

sometimes 0% financing is offered with

price discounts at the same time in

other words the 0% financing and price

discount are not mutually exclusive

usually all other things being equal

that would mean that the length of the

loan they offer 0% financing for might

be shorter and/or the price discount

smaller there are some other caveats to

be aware of whenever you see some of the

other types of offers for 0% financing

sometimes the credit score required to

qualify for 0% financing might be super

high that means that if you have a less

than stellar credit history you won't

qualify for the offer and instead get

offered a higher interest rate or 0%

financing might only be offered for very

short loan terms like 3 years or less

knowing that many buyers may not be able

to afford such high payments dealers

know that buyers will opt for a longer

loan with a regular interest rate once

they're in the showroom

sometimes 0% financing is only available

on certain models you see the lure of 0%

financing available but it's only

offered for say an entry-level car and

you're having a midlife crisis and want

to impress the new wave of interns at

the office well you might not be able to

get 0% financing on that kind of car

here is some final food for thought when

it comes to offers for 0% financing

number 1 it's best to think of 0%

financing as an incentive used to

increase the likelihood of you buying

it's not some altruistic gesture number

2 if you're offered 0% financing or a

large cash purchase discount it's

sometimes better to borrow the cash

purchase amount from someone else and

pay interest you could end up paying

less overall and finally although I

suspect this will be a polarizing

comment to sum number three aim to avoid

borrowing money to buy depreciating

assets while some would suggest they

couldn't otherwise afford

$25,000 car or whatever without a loan

that's kind of the point consider

looking for a cheaper car you could

afford to buy without a loan if possible

well that's it for this episode I hope

you'll consider subscribing to my

channel for more videos like this on

anything to do with money and making

financial decisions please do leave a

comment if you have anything to add to

the conversation or if you have any

ideas of what you would like me to cover

in a future video hey guys thanks for

watching mostly money I hope you enjoyed

today's show don't forget to subscribe

to my channel by clicking on the button

in the bottom right hand corner of your

screen the little thing that says

subscribe there are lots of videos to

explore on my channel like this one so

if you want to learn more about money

and personal finance in a fun way check

those out if you have any questions for

me

you can reach out to me on Twitter at

preet banerjee or you can leave your

questions and comments down below in the

comment section that's it for today see

you next time