Well, it’s August which means that car manufacturers are rolling out tons of deals on 2013 vehicles to make room for next year’s models!
The deal that usually gets the most attention in the car-buying world this time of year is 0% financing, which allows you to finance a new car through the dealer with no interest and no money down. You can also get 0% financing through major retailers (such as Sears and Best Buy) for large purchases such as TVs, computers, appliances, furniture, and mattress sets.
Sound too good to be true? Here are a few reasons you might want to reconsider the idea of 0% financing:
Like most limited-time promotions, 0% financing is a trick that a lot of car dealerships and stores use to get people in the door. Once they’re in the door, the goal is to convince the customer to buy something they probably wouldn’t on a normal day (the quicker, the better)… which is kind of a bad deal all around.
Most car manufacturers limit 0% financing to specific models – generally the most expensive and/or least popular ones, since those are the products they need the most help selling. If you want to buy one of the eligible models, great! But if you end up buying something you don’t really want or need because it qualifies for 0% financing, you’re going to be very disappointed and very broke.
Shorter term, higher monthly payments.
For cars, most 0% financing deals have a repayment term of 36 months. Meanwhile, a standard auto loan can have a term ranging from 24 months to 72 months. Interest or not, some people just can’t afford the monthly payments on a 3-year auto loan. Period. So rather than committing to interest-free payments you can’t afford, go for a standard loan with a lower monthly payment. Then pay extra principal whenever possible to reduce the effective interest rate.
Cannot be combined with other offers.
When you choose 0% financing, you’re much more likely to pay the full MSRP of the car since the dealer is already offering you a discount on interest. Meanwhile, through rebates and basic negotiating (haggling), you might save anywhere from $500 to $2,000… which more than makes up for the interest on a standard auto loan. You could also save on interest by putting money down when you buy the car, since down payments are already interest-free.
May damage your credit.
Finally, 0% financing can be problematic in that it encourages people to finance things they might otherwise pay for upfront – such as a new TV, computer, mattress set, washer & dryer, etc. Regardless of the interest rate, any type of in-store financing can cause your credit score to take a hit due to the initial credit inquiry (hard pull) and the fact that you’re essentially opening and maxing out a store credit card in one fell swoop.
To avoid any impact on your credit score, your best bet is definitely to pay with cash or debit. Otherwise, charge the purchase to an existing credit card (preferably one with rewards) and try to pay off the balance before any interest accrues.
Have you used 0% financing for a major purchase? Was it worthwhile?