Why 0% financing is not free!

Below is guest post from Ronny Miller, President of Gallup FCU

If you are like millions of other consumers you have been lured into the dealership with the promise of “Free Money”. Ok folks, it’s time for a reality check. Have you ever heard the expression, “If it sounds too good to be true, then it is.” Please repeat after me…..There is no such thing as FREE MONEY!

Qualification

The first big hurdle to overcome is actually qualifying for the best rate available. Less than 10% of those that apply for dealer financing actually qualify for the best rate available. The 90% that don’t qualify end up with some type of standard interest rate. Regrettably, they don’t walk away from the deal because at this point in the transaction they are too emotionally attached.

Dealer Financing versus Dealer Rebate

Here’s the standard example. Let’s say you qualify for 0% or instead you could take the $2000 rebate on a purchase price of $25,000 over 5 years. If you take the rebate you would have to finance $23,000 at an interest rate of 4.99% (This is the current interest rate for a new auto at Gallup FCU)

Purchase Price $25,000 vs. $23,000

Payment $417/month vs. $434/month

Total Cost over 5 years $25,000 vs $2,6043

At this point it seems simple right? $417 is less than $434 and you will end up paying $1043 more in interest, so this is certainly a no-brainer decision. WRONG! What you have to consider is effect of prepayment. The average auto loan last 36 months regardless of the original term. Why? Lots of reasons. We trade cars infrequency, auto accidents, and simply paying off debt at a faster pace than is required by the terms of the loan. When this happens the actual cost of borrowing is reduced.

Purchase Price $25000  or  $23000

Total Cost over 3 years $25000 or $24818

Now my guess is you are saying to yourself, yeah, but I’m not going to pay this off in 3 years. Fair enough. You have opened the door to my third and most important point, which is The Negotiation.

The Negotiation

Have you ever purchased a piece of furniture because they had an advertisement for, “12 months, No Interest”? 0% financing is very similar. If that loveseat costs $800 over 12 months with no interest, then I promise you they will take even less in cash today. So what does that mean? I’m sure you have figured it out. They are adding the interest cost right on top of the cost of the loveseat. Essentially, you are paying the interest upfront. Who wants to do that? Cash is a powerful negotiating tool so use it your advantage. Here’s my strategy for car negotiating: In the beginning don’t even mention the idea of paying cash. Let them assume you will be accepting their promotional rate or their rebate. After you’ve done your absolute best to get the price as low as possible then ask them how much they would come down if you just wrote a check for it. My guess, is you will be able to save at least $500 over and above my examples above and possibly more.