Ask Stacy: Is Zero-Percent Financing for a New Car a Good Deal?

While the best time to buy a car is now behind us, depending on the car you’re looking for, there are probably still bargains to be had, especially if the dealer offers incentives like special financing or cash back. But are those incentives to be trusted?

Here’s this week’s question:

Is 0% financing for a new car really a good deal? Or are there strings attached?
– Rick

Should you trust the zero-percent come-on?

If you don’t trust car dealers, you’re not alone. They consistently poll among the least trustworthy professions, tying with telemarketers and members of Congress. Only lobbyists rank lower.

When it comes to the zero-percent interest come-on, you’re right to be suspicious.

Dealers offer zero-percent financing to get people in the door, but a lot of those people won’t qualify. Zero-percent financing offers, typically available from the automaker’s financing arm, are generally offered only to those with excellent credit. (Check out the advertising fine print, and you might see words like “for qualified buyers.”)

The definition of “excellent” often means a FICO score of 720 or better, but that can vary among car companies and individual dealers. So before assuming you’ll qualify, call a local dealer and find out if you make the grade.

According to the New York Times, only 10 percent of car shoppers qualified for zero-percent financing last June.

It may be cheap, but it won’t be long

If you do qualify for zero percent, expect a short loan. While there are exceptions, many zero-percent offers are on three-year loans, which translates into higher payments than would normally go with longer-term loans.

Are they jacking up the price?

Offering zero-percent financing is a tried and true method of moving cars. What the manufacturer is essentially doing is reducing the price of the car by the amount of the interest they’re forgoing. If they’re making a zero-percent offer, it could mean that the price has been jacked up to cover the loss.

If you are wondering, however, the solution is simple: Negotiate the price as a cash buyer. Then, when the price has been established in writing, switch to zero-percent financing. If the zero-percent offer was honest, the price shouldn’t change.

Know before you go

Zero-percent financing is often used to attract buyers to specific models that may include expensive features and extras you don’t want. Don’t be persuaded to buy more than you need simply to secure a zero-percent loan, especially considering that car loans from traditional sources aren’t much above zero anyway.

According to our car loan rate search, in my zip code, credit unions are offering loans as low as 2 percent to borrowers with great credit. On a 2 percent, 48 month, $25,000 loan, the total interest tab over four years is about $1,000. Not nothing, but not worth accepting a car that isn’t exactly what you want simply to get zero-percent financing.

One of the primary rules of buying cars and houses is “financing first.” Never go house or car shopping without first being preapproved for a loan. Knowing before going is the only way you can possibly make intelligent decisions.

Zero percent or cash back?

The answer to the cash back or zero-percent option is revealed in the example above. You figure out the total interest bill, compare it to the rebate, then accept the one that gives you the best deal. That’s why you need to get preapproved and lock in a rate before you shop.

If you don’t want to do the math yourself, there are any number of calculators online that will do it for you, like this one from Edmunds. Cash back is usually going to be your best deal.

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About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

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