Zero Percent Car Loans: Are They Worth It?

Zero percent car loans and low-interest car loans are harder to come by these days, but these deals are still out there. Currently, 0% loans are available on some Ford, Lincoln, Mazda and Toyota models, while low-interest rates are available on Buick, Cadillac, Chevrolet, GMC, Honda, Hyundai, Kia, Volkswagen and Volvo models. Most manufacturers are offering this special financing through August, though the deals on Ford and Lincoln models are scheduled to run through Oct. 3. Offers may be extended.

Even so, if you are shopping for a car, tread with caution. While a 0% or low-interest car loan may seem enticing, it may cost you more than getting a loan through a bank or credit union would.

First, 0% car loans and low-interest car loans are given only to those with the best credit -- typically only 10% of shoppers. If you do qualify, it's likely you'll pay more for the car since dealers are less likely to haggle on price when they know that they won't be making any money on the car loan.

Even paying an extra $1,000 for the car makes a difference. For example, $26,000 versus $25,000 adds about $16 more to your monthly payment for a five-year loan at 0%. To combat this, don't mention the 0% or low-interest rate until after you've negotiated the car's purchase price.

Even if you do negotiate wisely and get a rock-bottom price, it still may make more sense to forgo the manufacturer financing for two reasons. First, many 0% or low-interest car loans have shorter finance terms, which in turn may take your monthly payment out of your budget. Second, it's typical that cash-back rebates don't apply for buyers using the manufacturer's special financing.

For example, if the 0% car loan or low-interest manufacturer loan is for four years in instances when you would typically finance for five years, the cost difference can be dramatic. On a $25,000 car loan through the manufacturer for four years, your monthly payment would be about $520 at 0% interest or $541 with a 1.9% interest rate.

If you opted for the manufacturer rebate and a five-year loan term through a bank or credit union, you'd spend more on interest but your monthly payment would be substantially lower than the four-year manufacturer loan. For example, with a $2,500 manufacturer's rebate, you'd lower your financed amount to $22,500. At a 5% interest rate, your monthly payment would be $424, while at a 4% interest rate your monthly payment would be about $414.

If the length of the loan is the same between the manufacturer's special offer and the bank or credit union, the difference isn't as dramatic, but taking the manufacturer rebate and getting a bank or credit union car loan is almost always the better option.

On a $25,000 car with a choice of a $2,500 rebate or 1.9% financing over five years, it's a better deal to take the manufacturer rebate and get financing elsewhere. At a 4% interest rate with the $2,500 rebate, you'd save $1,364 in total payments. With a 5% loan rate with the $2,500 rebate, you'd still save $750 over the life of the loan.

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