What's the Catch with 0% Financing?

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If you're interested in buying a car, you've probably seen a lot of low-interest special offers and incentives from various automakers. Many brands offer 0% interest, which suggests you can finance a car and pay no interest over the term of the loan. Does that offer seem too good to be true? It may be.

How’s it possible?

Since you're not giving the bank any incentive to lend you money, you might be wondering just how it's possible to get a 0% interest rate. The answer is usually it isn't the bank doing the lending but rather the automaker itself.

The way an automaker can make money with a 0% deal is simple: It still earns the same amount it would earn on any car deal, but now the money is earned over a longer span. So, the money isn't made on financing but rather the car itself. This means that 0% deals usually aren't a scam.

Bait and switch?

While 0% financing isn't usually a scam, it can often be difficult to qualify for, and that's where many shoppers run into disappointment. Dealers will often advertise 0% interest, for example, even when it's only available on select models or to shoppers with the absolute highest credit scores and a long credit history.

Dealerships love to offer 0% financing as a way to get customers in the door, but the reality is 0% financing is quite hard to get. While many customers may come in for a great financing deal, as few as 10% will actually qualify. Additionally, these loans typically have shorter terms of 12 to 24 months, which means higher monthly payments and hidden fees.

When shoppers with only average credit reach the dealership, they find out they don't qualify, and then they're presented with a higher interest rate. We wouldn't necessarily consider this a bait-and-switch scheme, since the 0% offer is technically being offered, but we would also suggest you don't assume you'll get 0% financing in all cases.

 

What can you do?

If the dealer explains you can't be financed at 0%, you shouldn't necessarily back out on the deal. But you should think about whether you're comfortable with the new rate you're presented with instead. If it's too high for your liking, remember you have other options.

As a member of SCE FCU, you can always avoid the dealership by using one of our Auto Buying Services. We suggest getting preapproved before you shop so you know exactly how much you can spend and the terms of the loan.