Zero per cent car finance offers can be tempting, however when we take a look at the numbers, they don’t always add up. Zero percent or low rate car financing deals are beginning to reappear as car manufacturers attempt to disguise price rises driven by a weaker Australian dollar, or cover up heavy discounting on poor selling models.
When it comes to car finance there is no such thing as ‘interest free’ or ‘free finance’. If the official cash rate is above zero, and the banks and other mainstream lenders are charging more than this, it’s a safe bet that you are paying for your zero percent interest somewhere along the way.
So where are the dealers and financiers making their money? Let’s have a look…
The price of the vehicle.
There is little to no flexibility on price when using a zero percent finance offer. You have to pay full retail for the vehicle and in doing so the finance provider still earns their cut. Essentially, the interest costs are factored into the upfront price of the car. You are often better off haggling on price and the arranging your own finance – especially given rates are so low at present.
Your trade in.
If you have a trade in, the dealer is far less likely to be generous when offering you a price for the vehicle. This can be problematic if you have current finance on the vehicle you are trading. You may not be able to use zero percent finance if you have negative equity (if there is more owing on the trade than the dealer offers you).
Higher servicing costs.
Zero percent deals typically only apply to new cars, however remember that it is likely you’ll be required to have the vehicle service by the dealer at set intervals – otherwise you risk voiding the warranty. These charges can be a lot more that you what you might pay at an independent mechanic.
A deposit and residual are usually required.
If you take a look at the small print of most zero percent offers, a deposit of at least 5% is usually required. This allows the dealer and financier to cover their costs upfront. A residual or balloon is also often required. This means that there will be an amount outstanding at the end of the loan term that you will need to either refinance, pay out with cash or could be covered if you trade the vehicle in.
Lets take a look at an example…
A dealership is currently offering zero percent finance on a vehicle with a retail price of $24,990 drive away. At 0 percent over five years your repayments would be $427.33 (assuming no balloon, standard establishment fee and $5 per month account keeping fee), bringing the total cost of the car to $25,639.80.
If you haggle the dealership down to $19,990 drive-away (this model was recently going for this price anyway!) and arrange your own finance, which comes out on top? If you have a good credit rating, you can expect to secure a rate starting from 6%. This would work out to be $398.23 per month over 5 years (assuming no balloon, standard establishment fee and $5 per month account keeping fee), bringing the total cost of the car to $23,893.80 – a saving of $1,746.
The numbers don’t lie, zero percent car finance offers are not always as good as they appear. It pays to do your research and get multiple quotes before making a decision on both the car and the finance. If you want an obligation free quote on your car finance or simply want to find out more about our car financing options, please get in touch with YOUR Broker, today!