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The 0% Finance Sales Pitch

When zero’s not hero, just like it sounds, this proposition is too good to be true.

Many economies around the word are experiencing record low interest rates. As a result, carmakers are increasingly turning to zero per cent finance offers as a key part of their marketing collateral.

Just like it sounds, this proposition is too good to be true.

If you’re thinking of updating your vehicle(s) — for business or pleasure — it’s worth stopping to consider the nature of the transactions carried out at a car dealer, and the underlying dynamics at play.

Buyers typically conduct three transactions at car detailers: purchase of the new car, trade-in of the old car, and the acquisition of finance. Doing all three under the one roof gives the dealer a lot of ‘wriggle room’.

Many dealers seek to offer an apparently great deal on one of the transactions as a hook — a nice, juicy inducement for you to focus on … while they more than compensate themselves for their largesse with the other two deals.

When interest rates were higher, the hook was often a seemingly unbeatable trade-in, with the finance and the new-vehicle price more than compensating the dealer’s bottom line.

These days, the hook is more likely to be zero per cent car finance.

With a zero per cent finance offer established and on the table, dealers will then commonly tell you they cannot discount the new car, and they will also commonly crunch your trade-in.

It might be a better idea to separate the three transactions, and arrive at the dealership with no trade-in, and finance independently arranged.
If you’re concerned that you won’t be able to arrange zero per cent finance elsewhere, don’t be.

Here’s an example. Let’s say you want to borrow $30,000 for a new car. At zero per cent over three years, your repayments will be $833.33 per month, totaling $30,000. (Most zero per cent deals are for three years only.)

Alternatively, why not offer the dealer $26,000 using finance you’ve already secured independently at 6.5 per cent over five years? (It’s always better to do this right at the end of the month, when dealers are eyeing off those nice, juicy bonuses from the carmaker … if they achieve their sales targets.)

In the case of $26k at 6.5 per cent over five years, your total repayments will be $30,523 — but your monthly payments will drop to $508.72 per month. Did someone just say ‘cash flow’?

There are numerous permutations that amount to the same thing: a realistic interest rate plus a negotiated discount often beats paying the full price at zero per cent. A $40,000 car at zero per cent will cost you $1111.11 monthly over three years. Alternatively you could walk in with $35,000 in your back pocket, figuratively, financed independently at 6.5 per cent over five years. All-up cost in the latter case will be $41,089 … but your monthly payments will drop to $684.82.

Zero per cent finance deals are often complex. If you’re not an economist, the mathematics can make your head spin. Often there’s a deposit, and a residual (or ‘balloon’) payment. What you need to focus on is simple: what is the all-up cost of the dealer’s finance proposition, versus the all-up cost of your own independently sourced finance? How do the monthly payments compare? What will the likely value of the asset be at the end of the term.

Don’t be lulled into a false sense of security by the big, fat zero, which is tantamount to the infamous carrot dangled in front of the donkey. Do your sums instead.

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