Have you ever been offered a new car on a zero percent interest rate? Chances are you have and at first glance been at least intrigued by the seemingly fantastic deal. As you ponder it further, you realise that there has to be something in it for the car dealer. After all, why would they finance your purchase for free?
Of course, there are a range of hidden dangers lurking beneath the surface of zero percent vehicle finance. In most cases, it isn’t a great deal at all, costing you more money than if you had purchased elsewhere. The finance terms are also restrictive and favour the dealer. Here are a few of the hidden dangers of zero percent vehicle finance that you need to be aware of when shopping for a new car.
It usually ends up costing you more
The appeal of zero percent vehicle finance mostly lies in the prospect that you will benefit from having a repayment period (instead of outlying the total cost upfront) for no additional cost. In reality, you need to take into account the total cost of each option. Typically, these no-interest offers don’t allow you to negotiate on the purchase price, and they’re usually only offered on new cars sold at the full recommended retail price (RRP).
“Dealers have been found to inflate prices of cars when offering a zero percent interest deal.”
Also, keep in mind that most of these offers are for a period of 3 years (or less). This shorter than usual payback period means that your monthly repayments may actually be greater than a longer-period loan, even if it has a higher interest rate attached. According to a news.com.au consumer report, dealers have been found to inflate the prices of cars after offering the deal. For example, they found a Nissan Pulsar for sale at $19,990. After the introduction of the zero percent finance, the price skyrocketed to $24,990. Even after taking into account the cost of above-market rate financing costs, this offer will end up costing the buyer significantly more, so be wary!
It’s little more than a sales tactic
Why would a dealer offer zero percent finance? It gets people in the door. You’ll notice that most of the time, the deal will only apply to vehicles that are about to be replaced by a newer model, or those that are not popular and difficult for the dealer to offload. They’re also not usually available on vehicles with upgrades or add-ons, so you’re stuck with the exact model they want to sell. Zero percent finance is also only run for limited periods, adding another layer of urgency and pressure the salesperson can leverage to get the sale across the line.
Unfavourable loan terms
Again, the loan favours the dealer, not the buyer. Zero percent finance is usually only offered over a three-year term. This is much shorter than a typical vehicle finance deal and in many cases, means your monthly repayments are higher. The deal is also extremely rigid, meaning you can’t negotiate any of the loan terms, including the balloon payment owed at the end of the financing period. A balloon payment is a lump sum owed to the lender after all your repayments have been made. The larger your balloon payment, the lower your monthly repayments will be and vice versa. You must be able to negotiate the best lump sum agreement for your situation.
What to do instead
Rather than fall for a zero percent finance deal that’s too good to be true, consult an expert. Experienced vehicle finance brokers can help you and your business find the right deal for your specific situation. Instead of settling for one offer from a dealer, business vehicle finance brokers access their panel of trusted lenders to compare and negotiate the best deal on your behalf.
“Use tools such as our car loan calculator to quickly get an idea if your deal makes sense.”
When it comes to budgeting your potential monthly repayments, make sure to use tools such as our car loan calculator to quickly get an idea if your deal makes sense. Simply input the purchase price, term of the loan, residual value (or balloon payment) and the interest rate to calculate your monthly repayments. Compare this to a zero percent finance offer and see which works out best.
Whether your small business is looking to buy a new car, commercial fleet, equipment or just needs to sure-up some cash flow, Capital Plus Finance is an experienced business finance broker that has your best interests at heart. The team at Capital Plus Finance will do everything we can to help you secure a suitable finance solution for your small business. Please give us a call anytime to find out more or to have an obligation-free chat about your business’s funding situation.