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The Problem with 0% Financing: What You Need to Know

When the time comes to purchase a new vehicle, the offers of 0% financing begin to pour in from dealerships. Many new buyers accept them. After all, 0% financing provides the best value for the money, right?

Wrong. This loan offer isn’t just misleading, but sometimes unfavorable as well. So, what is the catch with 0% financing?

What Is 0% Financing?

Put simply, 0% financing is a type of loan that does not require interest to be paid back over the life of the loan. This means that only the upfront financing costs are repaid to the lender or dealership. As you might imagine, this means that 0% financing loans are extremely difficult to qualify for, with successful applicants possessing high to extremely high credit scores.

Borrowers who comfortably make auto payments on 0% financing usually have a 20% down payment, accept shorter term lengths, and complete adequate research. This helps them avoid going "upside down" on the loan.

Why 0% Loan Financing Fails To Impress

If a certain situation seems too good to be true, you can bet that it probably is. In the case of 0% financing, the situation may be too pretty on paper to offer any real value.

If you believe that financing a 0% loan through an auto dealer will provide you with the best value, you might want to think again. In fact, signing for one of these loans may cost more than financing through Best Reward Credit Union, even at a higher interest rate.

Let’s take a look at an example that helps to explain the concept.

Say a buyer wants to finance a $20,000 vehicle on the MSRP. The dealership offers a 0% financing deal for $24,000 over a term of 60 months. With no interest rate, monthly payments will be $400 a month.

On the other hand, Best Reward Credit Union offers a similar auto loan. While the loan is not 0% financing, it is exactly $20,000 with a 4.50% interest rate. This will result in a monthly payment of $372.92, nearly $30.00 less than the 0% financing loan.

You must be careful to avoid getting wrapped up in the thrill of 0% deals. Although the interest costs are listed as zero, the true numbers are built into the price of the loan. Unless you’re aware of this before signing on the dotted line, you may be signing into a less than stellar deal.

Which type of loan is the best option? The real answer to that depends on a few factors.

When Is 0% Financing A Good Idea?

Opting for a 0% financing loan may be the best decision for you if:

  • You have a high to extremely high credit score and long debt repayment history.
  • You can contribute a down payment that is a minimum of 20% the cost of the car.
  • You feel financially secure enough to make regular auto payments for four or more years.
  • You are willing to take time to compare different deals and select the best option.

When Is 0% Financing A Bad Idea?

Choosing to take out a 0% financing loan may not be a good idea if:

  • You have a lower credit score or shorter debt repayment history.
  • You can’t support regular car payments for four or more years.
  • You can’t contribute a 20% down payment to the car in question.
  • You do not feel comfortable paying higher vehicle costs instead of an interest rate.

Get Auto Financing Education With Best Reward

Deciding to finance at 0% is entirely up to you. There is no right or wrong answer for choosing to take out a zero-interest loan. Ultimately, it is important to explore, question, and research all financing options before making a final decision. At Best Reward Credit Union, our team is dedicated to helping you be the most educated you can be about your next auto loan and invite you to learn more about the process.

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