If you’re looking to buy a car, you’ve perhaps come across several low interest special offers and incentives from various automakers. Many brands offer 0 percent interest, which suggests that you can finance a car and pay no interest over the term of the loan. Does that offer seem too good to be true? Read on to know!
What is 0% interest on a car loan?
Before we emphasize whether 0% interest on a car loan is too good to be true, it’s crucial to explain precisely what 0% interest is. To do that, we’ll have to get into an explanation of car loans.
When you opt for a car loan, you’re borrowing money to pay for a car; that much is obvious. But the bank doesn’t offer you that money for free. Instead, you have to pay what’s called interest, a fee that you give the bank for lending you its money.
For 0 percent auto loans, you pay zero interest. That means you’re borrowing money from a bank but paying no fee for the privilege of doing so. Essentially, 0 percent interest gives you the chance to pay the same amount of money as a cash buyer, even though you’re branching out your payments over a longer term.
How Is It Possible?
Since you’re not presenting the bank any incentive to lend you money, you might be thinking just how it’s possible to obtain a 0 percent interest rate. The answer is that usually it isn’t the bank doing the lending but rather the automaker itself.
The way an automaker can make money with a 0 percent deal is simple: It still earns the same amount it would earn on any car deal, but now earnings are made over a longer span. So the money isn’t made on financing but rather the car itself. This means that 0 percent deals usually aren’t a scam.
Bait and Switch?
While 0% financing isn’t typically a scam, it can often be hard to qualify for, and that’s where many shoppers feel disappointed. Automakers or dealers will often advertise 0 percent interest, for example, even when it’s only available to shoppers with the absolute highest credit scores and a long credit history.
When shoppers with not the best credit visit the dealership, they find out that they don’t qualify, and then they’re offered a higher interest rate that will earn more money for a dealer or an automaker. We wouldn’t necessarily understand this a bait-and-switch scheme, since the 0 percent offer is technically good, but we would also suggest that you don’t make the assumption that you’ll get 0 percent financing in all cases.
What Can You Do?
If you’ve been lured in with a 0 percent interest rate, make sure you confirm that the rate is available once you get to the dealership. Next, take the car on a test drive and negotiate a good price. At this point, the dealer will peruse your credit history to see if you qualify for 0 percent financing.
If the dealer says that you can’t be financed at 0 percent, you shouldn’t necessarily decline the deal. But you should think about whether you’re comfortable with the new rate that you’re presented with instead. If it’s too high for your liking, remember that you do have the freedom of considering other options.