If you’re thinking about buying a new car, you owe it to yourself to do your research on financing options. Don’t be fooled by dealer promises of zero-percent financing. Let’s take a look at four hidden costs that come with these advertised low rates.
First, you may not qualify for zero-percent financing.
Car commercials don’t talk about the fine print, but dealers place a pile of restrictions on zero-percent financing. If your history with credit is anything less than perfect, don’t expect to qualify for these rates. Roughly 60% of people who apply for those loans get rejected.
Second, these loans are usually short-term.
If the dealer is offering zero-percent financing over the life of the loan, expect it to be no more than three years. This means a much higher payment than you’d have on a five- or seven-year loan. Additionally, many zero-percent financing offers only cover part of the life of the loan – usually six months. After that, you’ll be paying more in interest.
Third, dealers may promise zero-percent financing to trick you into paying more.
With their knowledge of your financing options, they can manipulate the price of your trade-in and the cost of the transaction to arrive at a monthly payment you’re happy about. That way, you’ll focus on the cost of the payment, not the price of the car.
Fourth, choosing zero-percent financing may prevent you from taking advantage of other discounts.
Manufacturers offer zero-percent financing instead of rebates and other discounts. Also, these financing packages are usually incompatible with special discount programs.
Let’s run the numbers.
This last hiccup can mean zero-percent financing is actually more expensive than a loan obtained through a private lender.
Check out the calculator below to view different scenarios:
Definitions
Total purchase price (before tax)
This is the total cost of your auto purchase. Include the cost of the vehicle, any additional options and any destination charges. Don’t include sales tax in this amount. Sales tax will be calculated for you and included in your total after-tax price.
Term in months
Number of months for your auto loan.
Cash down
Total amount of cash used in this purchase. The larger your cash down payment the smaller the loan you will need to finance this purchase.
Trade allowance
The total amount that you are given for any automobile that you trade-in as part of this purchase. In some states a trade-in can also reduce the amount of sales tax you will owe. See the definition for ‘Sales tax deduction for trade-in’ for more information on trade-in vehicles and sales tax.
Amount owed on trade
Total loan balance still outstanding on the trade-in.
Sales tax rate
Sales tax percentage rate charged on this purchase.
Traditional financing
The interest rate you may be able to receive from a bank, credit union or other lender. This is usually a higher interest rate than the manufacturer’s low interest financing, but is often very competitive when used in combination with a manufacturer rebate. This calculator assumes that if you choose a manufacturer rebate you are not eligible for manufacturer low interest financing.
Low interest financing
The incentive interest rate you may be able to receive from an auto manufacturer. These rates are usually significantly below standard auto loan interest rates. Low interest financing can be as little as 0% per year. Most manufacturers allow you to choose either low interest financing or a manufacturer rebate, but not both. This calculator assumes that if you choose low interest financing you are not eligible for any manufacturer rebate.
Manufacturer rebate
A cash rebate paid by the auto manufacturer to you when you purchase a new vehicle. Most manufacturers allow you to choose either low interest financing or a manufacturer rebate, but not both.
No sales tax deduction for trade-in
If you live in a state where your sales tax is calculated on your full purchase price check this box. If this box is unchecked sales tax is calculated on the purchase price less trade-in. Currently California, the District of Columbia, Hawaii and Michigan allow no deductions for trade-ins when calculating sales tax. In addition, Alaska, Delaware, Montana, New Hampshire, and Oregon have no sales tax on autos.
Calculate sales tax before rebate
Some states will calculate sales tax on your purchase price before a manufacturer’s rebate is applied. If your state calculates sales tax on the vehicle price before the rebate is applied, check this box.
United Texas Credit Union
5500 UTSA Boulevard
San Antonio, TX
Information and interactive calculators are made available to you only as self-help tools for your independent use and are not intended to provide investment or tax advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
Have funding lined up in advance.
This can be a tremendous advantage in negotiating. By continually postponing questions of financing, you can let the dealer think there’s still money to be made. This position might lead them to give you more on your trade-in, lower the price of the car or offer you more options.
The loan you get to pay for your car may be the biggest financial decision you make outside of your home. You owe it to yourself to do your research. You wouldn’t buy a car just because it had an enticing price tag. Why would you do that with a loan?
If you’re considering buying a new car, your first call shouldn’t be to the dealership. Contact United Texas CU instead. Our professional staff can answer any questions you might have about auto loans and other options to finance your new car. Take the time to educate yourself about your vehicle financing options. Your wallet will thank you for it!
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