Why A 0% Auto Loan is Not Always the Best

Most people will say that you should always take advantage of 0% APR financing. How can it not be a good deal if you can use someone else’s money for free?

This is a common misconception and dealerships use this marketing tactic regularly to attract buyers. Think about how else they would make their money. Why would a dealer, want to give away free money? Especially if most of their money is made on financing and service.

When shopping for a new car, make sure to look at all the available incentives. There will usually be an incentive for those financing through the dealer and for those financing with another bank or paying cash.

How can you find out you are getting the best deal and saving money? Calculate how much you will end up paying for each loan at the end of the loan term. This will show you how much you will pay for the car and also how much you saved. Savings can be thousands of dollars, so take the time to do these calculations.

You might be asking how you can do this and how is this possible?

Usually dealers will offer you more money in incentives if you finance an auto loan through another bank or pay cash. Since you are offered more money upfront, the amount of the loan will be lower. Thus having a lower auto loan with interest can actually be cheaper than paying 0% APR on a higher auto loan amount.

Useful Example

I will go through an example to show you how this works.

Below is a screen shot of the current incentives for a 2016 Ford Fusion. Offer 1 is for those financing with an outside bank or paying cash. Offers 2, 3, 4 are for those financing through Ford (dealer).

As of this article, several banks have auto interest rates are around 2.01% APR. A 2016 Ford Fusion’s MSRP, as of the writing of this article, is $22,110. To make things easy, I will compare Offer 1 and Offer 4. Offer 4 is 0% APR for 72 months; which means we will pay all of the $22,110 back in 72 months with no interest.

For offer 1, I will subtract the incentives from the MSRP ($22,100 – $500- $1,000- $1,000) to get my loan amount. This leaves me with an auto loan of $19,600. Taking a bank loan at 2.01% APR in the amount of $19,600 for 72 months; I will have to pay $20,822 at the end of the 72 months.

I would save $1,288 by taking offer 1 and financing through an outside bank. That cost me only $1,222, in interest, to borrow the money from the bank.

There are times where a 0% APR is the best deal. This is usually when there are no incentives for using another bank or if the APR of another bank is high.

The best way to ensure you are getting the best deal is to look at how much you will pay at the end of your loan term for each loan. Taking the time to do this can save you thousands of dollars.

More Help?

If you would like more information about this topic or would like help in calculating different auto loan options, leave a comment below or come into the SonAriz Financial branch to get a one on one instruction.

You can also contact us through any of our support channels listed on our Contact Us page with your question or example. We can give you a summary of the deal you are working on and ensure your are taking the best deal.

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