- 1 The truth about 0% car finance – how it works and how good the deals really are
- 2 0% financing: five things you need to consider
The truth about 0% car finance – how it works and how good the deals really are
It sounds incredible – pick up a brand new car and get to spread the cost over a number of years without it costing you a penny. But how does it REALLY work – we reveal all
Fancy a new car, but don't have the cash up front? Well, have you thought about 0% finance?
It sounds like and incredible deal – letting people spread the cost after the purchase, rather than save up before, at no cost at all.
"Who wouldn't be attracted by a 0% finance deal on a new car, but like any contract, you need to check the terms and conditions before you sign it,” Shaun Armstrong, managing director of car finance provider Creditplus.co.uk , told Mirror Money.
It also sounds too good to be true. So what's the catch?
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The problems with 0% car finance deals
"It’s not a scam. The problem is that most people won't qualify. You have to have a good credit profile to secure most 0% deals,” Armstrong explained.
“Also, to secure a 0% finance deal you may have to put down a large deposit – as much as 40% in some cases - although this is not the case on every deal.”
And that means the offer of 0% finance might simply be advertising – drawing people in only to offer them something a lot more expensive later.
"Having been dangled the carrot of a 0% finance deal, those who don’t qualify will likely be presented with another deal that has a higher interest rate - and it can be harder to walk away once you’re in talks with a dealership,” Armstrong added.
“Also, check the true price of the car by shopping around. What a dealer or seller may do is prepay the interest on the loan for the customer by adding the total interest to the car being purchased.
“It’s worth checking you’re getting a good deal by seeing what the car sells for elsewhere without the 0% offer, then compare to see if there’s any uplift in purchase price.”
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There are two main ways to buy a car with dealer (ideally 0%) finance – PCP and HP.
With PCP – or personal contract purchase – you pay a deposit, then make monthly payments for a fixed term. At the end of it you have the choice of either making a final payment to own the car outright or you can hand the car back to the dealer.
With HP – or hire purchase – you also pay a deposit and make monthly payments, but at the end of the fixed term the car is yours outright.
That means your payments are typically higher with an HP deal than a PCP one, but at the end of it you definitely get to keep the car.
So if you're the sort of person who likes to drive a new car every few years, PCP might well work out cheaper. But remember if you want to keep it, you'll have to find a large chunk of money at once to secure your ownership at the end of the deal.
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Ideally you'd pay for the deposit from savings, but if that's not possible you could easily end up cancelling out any gains you made with a 0% car finance deal buy racking up interest on your overdraft or on a credit card.
The good news is there are ways to raise this money that will cost you far less.
Firstly, if you qualify, you can get up to 30 months of 0% credit with a purchase credit card .
Secondly, you can use a money transfer card to pull cash into your current account. These come with an initial fee, but let you spread the repayments over more than 3 years, offering an effective interest rate of a little over 1% a year on the total balance.
For larger amounts, personal loan rates are at all time lows , with deals of 2.8% over 3 years available at the moment.
Of course, the danger here is - as with 0% car finance deals - the best rates and longest 0% periods are only on offer to people with the best credit ratings.
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Remember, while 0% deals can look incredibly attractive - and used right are a fantastic way to fund the cost of a new car – don't ever sign on the spot.
And on top of that, don't think it's your only option.
"It's always worth having alternative financing in place, so that you have a back-up if you don't qualify for the 0% interest deal,” Armstrong said.
Here are his two top tips to getting the best out of a 0% car finance deal:
Check what happens if you miss a payment. Are there any penalties and how much are they?
Don't be forced into signing a finance agreement, however attractive it seems, without checking it thoroughly. Take it away, read through it and fully understand the terms before you sign.
0% financing: five things you need to consider
0% finance sounds like free money, but it may not be the best deal when it comes to buying a car. Here are five things you should know about 0% financing before you sign on the dotted line.
When buying something as expensive as a car or a house, many of us need some sort of financing to help us out. And almost all of these financing products require us to pay interest on the borrowed amount.
This helps the bank or financing company make a profit, as well as cover the risk of borrowers being unable to pay back their loan and defaulting.
For example, let’s say we borrow $40,000 to buy a car. If that loan has a 5% interest rate and requires us to pay it off over four years, we’ll end up paying around $4,216 in interest.
Naturally with a finance deal with an advertised interest rate of 0%, we won’t have to pay a cent of interest. And while that might sound like the deal of century, scratch under the surface and it may prove to be less than ideal for you.
First, it’s important to realise that 0% financing is a tactic to get people into showrooms.
That’s because, for whatever reason, some models just aren’t as popular as others. Maybe they’re a highly fuel efficient model in a time of cheap petrol, or a gas guzzling SUV in an era of record high fuel prices, or just a model nearing the end of its life.
To draw buyers towards these models, automakers and dealers can do a number of things to drum up interest. For example, they could come up with special-edition versions, add extra equipment, discount the car, switch to drive-away pricing, or just spend bucket loads of cash on advertising.
Another proven tactic is 0% financing. It’s attention grabbing and it appeals to our desire to get a great deal. When you see a tempting advert for a car with 0% financing, be sure to read the fine print underneath.
In almost all cases only selected variants of a particular model are being offered with interest-free financing.
For example, the 0% deal may only be applicable to the entry-level variant, or vehicles from a previous model year that are missing some equipment or upgrades available on newer cars. Adding desirable options or jumping up to the next trim grade is often not allowed.
Another common catch is that cars sold with 0% finance deals are sold at the full recommended retail price. This takes away an important part of the car buying process, the ability to negotiate on price.
To make matters worse, dealers may not be as generous with their trade-in offers if you go with interest-free financing.
Not only do you lose the ability to bargain, the terms 0% finance deals are set in stone. So, everything, including loan length and the final balloon payment can’t be altered.
According to Richard Kew, director of Platinum Direct Finance, most independently sourced car financing plans in Australia are around four years long. On the other hand, typical 0% interest rate deals offer next to no flexibility and a shorter term, for example 24 months.
This means that your monthly repayments will be higher, although you could get to own your car outright earlier.
If a manufacturer’s 0% finance offer on a particular car is a success, it may have a negative effect on the vehicle’s resale value.
That’s because there will likely be a glut of that make, model and trim coming onto the secondhand car market at the same time. With so many practically identical cars heading back onto dealer lots, virtually, all at once, resale prices are bound to be hit.
This is not to say that an interest-free financing offer won’t work for you: just make sure you do all your sums first.
Written in consultation with our finance partner Platinum Direct Finance.