0% Financing May Not Be the Best Deal

Nearly a decade ago, struggling auto makers began offering 0% financing deals for new car buyers.The goal of these programs were to sell cars and the auto makers hoped that 0% deals would do just that – and they were right.Car buyers (currently in the market or not) flocked into auto dealerships seeking these financing deals. And, while some qualified for them, most did not. Once the buyer was in the dealership, the hard sell began – making it nearly impossible for the consumer to leave without a new vehicle – regardless if they qualified for the 0% financing or not.Are these 0% financing deals really all that beneficial? Maybe? But, for the majority of auto buyers they really offer very little incentive – here’s why:Most 0% financing deals are for only 36 months (3 years). Which is OK if you can afford a very high payment. Example, Ford is offering a 36 month, 0% financing deal for their Focus product line. A standard Ford Focus is priced around $17,000. Financing this vehicle, assuming 5% down, puts a payment around $449 for 36 months at 0%.A high monthly payment for a low budget consumer. The only real benefit is that this vehicle buyer would pay no interest over the life of the loan (provided that the dealer or manufacturer has not built some level of financing into the price of the vehicle).However, Ford is also offering 2.9% financing for 60 months. The same vehicle (with the 5% down) at 2.9% for 60 months (5 years) sets the payment at about $290 per month.Much more affordable for consumer who seeking to purchase a vehicle of this nature (meaning that this is a lower priced car, with limited features, geared for the low income buyer – low income buyers who cannot afford $449 per month in car payments). But, $290 is much more affordable than $449 per month (a monthly cash flow difference of $159).The one problem with this financing deal is that at 2.9%, the borrower (car buyer) would have to pay interest for the 60 months loan. But, what does this interest really costs?A 17,000 vehicle, with 5% down, at 2.9% for 60 months equates too approximately $1,300 in financing (interest). If looked at over 60 months, this is about $21 per month.But, Ford is also offering, on this same vehicle up to $3,000 cash back (not applicable with the 0% financing deal). This cash back option would more than cover the cost of financing – in fact, this cash back option would essentially pay the borrower some $1,700 (in overall benefit) for financing the vehicle and not taking the 0% deal. That’s $1,700 to the buyer’s good ($3,000 cash back minus the $1,300 in financing costs equals $1,700).Interestingly enough, this auto buyer could essentially have their financing rate increase to 6.9% for the 60 months before the cash back of $3,000 losses its financial benefit.The bottom line here is that 0% financing can be a good deal provided that other options do not offer better benefits. Instead of just looking at the financing rate (where 0% is always better than anything else) one should consider all offers and choose the one that makes the most financial sense.All the above assumes that the purchaser would qualify for both the 0% financing and the 2.9%, 60 month financing options.