Is 0% Financing Always The Best Option?

When manufacturers offer 0% fiancing, you need to ask yourself  "is 0% really the best way for me to
go to go?"  The answer to that question is yes and no. There are a number of different factors in play that can determine if 0% financing is really the best way for you to go.

The first thing you want to look at is what you are giving up. Typically, when manufacturers offer special APR programs, you usually lose a portion if not all the rebates available on the vehicle. For instance, a manufacturer may be offering a rebate of $4500 on a vehicle, OR, in lieu of the rebates, you can take the 0% option.
What you want to do here is look at your total time price, or the total amount including interest that you would pay for the vehicle assuming you kept it the full finance term.

 For example, if you are financing $42500 at 0% for 60 months, your payment is $708/month and your total time price is $42500. However, to get the 0% you have to give up $4500 worth of rebates. If you take the rebates, you would be financing $38000. For 60 months @ 3.99% your payment would be $699 and your total time price would be $41940.

As you can see, sometimes the rebate, if it is large enough, combined with good credit score is enough to offset the 0% advantage. The key though, is having a good credit score. A high interest rate wouldn't be enough to offset the 0% and if your score isn't high enough, you probably aren't going to qualify for the 0% rate anyways.  Which brings us to the next point, what kind of conventional rate can I get?

Before you enter a dealership, it's good to know what you can get pre-qualified for either through your bank or credit union. This does two things. First, it gives you a baseline interest rate to compare against the 0% program.  Secondly, it also forces the dealer to see how low a conventional rate they can get you. The dealer typically makes a small flat fee ranging from $100-$300 from the finance company on 0% deals. On conventional financing, the dealer gets a portion of the fiance reserve which is often more than the flat fee so it is in the dealerships best interest to see if they can get a low enough rate for you to offset the 0%.

Make sure you know the loan term for the 0% program. Often it is for a shorter term like 24 or 36 months. If you had a payment range in mind, the 0% at the shorter term may not help you get to that payment. Even though the money is "free" the loan term is shorter than a typically 60 or 72 month loan term so the principal is paid out over a shorter period of time negating the 0% benefit. If your intention was to pay cash for the vehicle, than the 0% option is a good option for you no matter what the term is.

If you're someone who trades frequently (every 36-42 months) than the 0% may not be right for you. When you take the rebate, you start off with a lower principal and will have equity in the vehicle quicker than if you had opted for the 0% financing.

Finally, " if it's free money, should I put money down if I use 0%?" This is really up to you and how disciplined you can be. Most people have a monthly payment budget allocated. Lets say that you intended to put $5000 down to get to a payment of $400/month. After thinking about it you decide not to put the money down and finance the whole amount at 0% .This just took your payment to $485 month. Do you have the discipline not to spend the $5000 you didn't put down and apply it to your monthly payments?

These are just a few examples of how 0% financing may or may not be the best option for you . It really all comes down to each persons individual situation.

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