You’ve just spotted that new car you always wanted but it’s a stretch beyond your current budget. To sweeten the deal, the dealer is prepared to offer an interest free loan. This must be your lucky day, right!? I mean, who wouldn’t want to save themselves thousands of dollars in interest expenses? It all sounds convincing but is the decision as straightforward as it sounds?
While a growing number of car manufacturers offer such deals through their dealerships, that’s not indicative of the deal’s popularity. The reality is, that in many instances, such an arrangement will end up costing you more. You might ask, “How will I be worse off?”. Well, as a form of sub-vented finance, the dealer will be paying interest on your behalf to the financier – which, as you guessed it, means dealers would be remiss to their employer(s) if they didn’t try to recoup these lost earnings.
Take for example, the price of your shiny new car. A 0% interest loan is usually based on the full (retail) price of the vehicle. In cases where there is some movement, it’s still within a limited range. Instead, if one was able to negotiate the sale price of the vehicle and bring the price down, it’s conceivable that you would save more money – depending of course, on your ability to make the repayments. In August last year, News.com.au published findings that indicated a Nissan Pulsar was $2,541 cheaper across three years when purchased with a regular loan at 8%, with interest payments offset by a $5,000 difference in the vehicle’s purchase price ($19,990 vs $24,990 when bought with 0% finance). Ensure that you enter the dealership with knowledge of the vehicle’s ‘going’ market value, and how much you can buy it elsewhere.
You’ll also need to remain wary of the terms associated with an interest free loan, with reduced scope for flexibility meaning you should pay off all (or as much of) the loan within the interest free period – often three years, at which point a balloon option might become available. The balloon option is one method of reducing interim repayments but means a large lump sum is due at the end of the deal, which may require further financing (at a less than desirable rate). Keep an eye out for any references to the deposit sum, which could be significantly higher than normal to ensure the dealer’s interest payments (on your behalf) are minimised.
Don’t forget, if you’re thinking about trading in a vehicle to offset the new purchase, it’s likely your vehicle will be undervalued so the dealer can attract a higher margin on the resale of your trade-in. In this instance, it goes without saying that you should undertake appraisals on your vehicle’s trade-in value. There are even some instances where dealers will ‘guarantee’ a specific trade-in value in the future when you look to upgrade again. What this does however, is ties you to that dealer and reduces your flexibility to negotiate.
Interest free finance campaigns are intended to boost foot traffic through dealerships, at which point the ‘hard sell’ begins. It’s an effective form of marketing for dealers and manufacturers because they can apply different sales strategies to customers who qualify and take up the offer, with those who don’t – but ultimately, that doesn’t mean it suits the needs of all customers equally.