Auto Loans: Is Zero Percent Financing a Good Deal?
Zero percent financing has worked very well for car dealerships that want to sell lots of new cars and trucks. In fact, it has worked so well that now other types of sellers, particularly furniture companies, electronics retailers and credit card companies are getting in on the act.
The truth is that paying for a new vehicle or any other item for that matter with zero percent financing is nothing more than a really good marketing tool that is dishonest, very misleading, and borders on qualifying as a credit scam. It is very similar to the old "bait and switch" tactics used by sales people for decades. They lure you in to the show room with the offer of zero percent, then they tell you you don't qualify and try to sell you the merchandise anyway.
Before you fall for their sales pitches, here are a few facts about zero percent financing --
(1) Only about 5% of all consumers qualify for zero percent financing. You must have an excellent credit rating and a certain amount of income to qualify. An acceptable credit score would be at least 750 to qualify for zero percent interest. Unless you have very good credit, practically no debt, a very secure job and you own your own home, you probably aren't going to qualify for zero percent financing. What the ad promising you such a deal did was lure you on to the car dealership lot or in to the furniture showroom with the promise of zero percent financing.
(2) Secondly, even if you do qualify for zero percent financing, zero percent interest rate offers always come with a relatively short pay-back period of probably not more than two years. Can you afford to pay off a new car you have financed in two years? Can you afford to pay off $10,000 worth of furniture in two years? And since you will be paying off your purchase in just two years, even with a zero percent interest rate, your monthly payments are going to be very high. So the answer is probably not, but they managed to lure you in to the showroom with the zero percent financing offer and they think there is a good chance you will buy the item you came to see anyway and you accept whatever interest rate they offer you.
(3) The third reason zero percent financing isn't a good deal is that if you don't pay for the merchandise you are buying within the agreed time period specified in the contract, you must pay an amount of interest agreed upon in the contract as if it had been accumulating from the date you signed the contract. For example, if you purchased furniture on a zero percent interest rate program and failed to make a monthly payment, the terms of the contract change, and the deal is off. You are now charged a very high rate of interest that began accumulating the day of your purchase and perhaps all kinds of penalties and fees will be tacked on as well. This will tack on hundreds or even more than a thousand to the price of the item you purchased.
(4) Even if you do qualify for zero percent financing, sellers often make up for the lost profits by jacking up the price of the product. They can do this quite easily because the customer is so thrilled with the zero percent financing that he forgets or overlooks the fact that he is overpaying for the product. This is particularly true of automobile purchases and furniture. Very few people who qualify for zero percent financing will actually haggle with the car dealer or furniture store over the price since they think they're getting such a good deal with the zero percent interest rate. You are not getting a good deal.
If you reread points 1 through 4 above, you realize that zero percent financing always works best for the seller and not the buyer. The seller really can't lose, no matter what. The only situation where a zero percent interest rate works is with a credit card that does not have an annual fee and offers a six month period with zero financing.
In summary, zero percent interest rates work very well for people with excellent credit ratings, who always pay their debts on time and have an above average income, but most of these people can afford to pay cash for their cars and furniture and most of them are aware that the price of the car or furniture was significantly inflated to begin with, so zero percent financing offers don't appeal to them. For the rest of the people -- about 97 percent of Americans -- zero percent financing is nothing more than a really good gimmick to lure customers in to the showroom and pay significantly more for the items they purchase.