Should you take 0% financing?

Posted by | September 12, 2019 | Uncategorized | No Comments

This is a common question for car buyers. On a daily basis, people are bombarded with car commercials. Many of them spend just as much time touting rebates & deals as they do explaining vehicle features or quality. Most people buy a car once every few years. So today’s question is, should you take 0% APR financing?

Let’s dig into the factors you should consider when making this decision.

  1. How much are you financing?
  2. How long do you plan on keeping your vehicle?
  3. What (if any) cash rebate must you give up in order to get the 0% financing?

How much are you financing?

The basic concept here is that the more money you finance, the more benefit you get from 0% financing. So, customers who have strong equity in their trade-ins will not benefit as much from taking 0% financing as those who are “upside down” on their trade-in.

How long to you plan on keeping your vehicle?

Taking 0% financing is an option that pays you over time. Each month, you are getting a portion of the benefit of paying 0% interest vs. the market interest rate you would have been able to get. If you plan on keeping your vehicle for the duration of your auto loan, you will receive the full benefit of the 0% savings. However, if you plan on trading before the loan is up OR if you plan on paying the loan off early, you are leaving money on the table.

What cash rebate are you giving up in order to get the 0% APR?

In most cases, the car manufacturer will give customers the option of a cash rebate in lieu of the 0% financing offer. Depending on how much the cash offer is, you may be better off choosing it. To find out, first run the numbers on a loan with the cash rebate. The finance charge of this loan is the amount of money you pay in interest. The second step is to compare your finance charge to the amount of the cash rebate. If the finance charge > the cash rebate, that means the 0% option will save you money in the long run (keeping in mind that this scenario only holds true if you pay the loan off completely on-time but not ahead of time).

The best way to compare the 0% option to the cash rebate option is to simply ask your sales consultant to calculate your purchase both ways. Use the same loan term & the same amount of money down. On the surface, the cheaper payment will represent the least money out-of-pocket for you. However, keep in mind that if you want to trade before your loan is paid off, you’ll want to strongly consider the cash rebate even if it’s a few dollars more per month.