We all hear and see ads touting zero-percent financing. Usually, our first reaction is, “Wow, I can get a car loan and pay no interest!” Well, not exactly.

Zero-percent financing is one of the most popular incentives in the automotive industry, and it is offered by the finance arms of major auto manufacturers. Just as they offer vehicles with cash rebates, car companies subsidize the finance arms of their corporations, essentially pre-paying the loan interest on their vehicles.
Does the “zero-percent financing” offer work to bring buyers into dealerships? According to the J.D. Power Dealer Finance Study, it is considered one of the most successful motivators to get car buyers into dealerships. While the enticement of zero-percent financing may bring you into a dealership, many car buyers do not end up with the zero-percent loan, and for a variety of reasons.

When it comes to zero-percent financing, here are the facts:

1. Zero-percent financing usually requires a shorter-term loan, which can require higher payments.  The most common zero-percent finance deals do not extend for as long as conventional auto loans, so many buyers may opt for the conventional loans in order to keep the monthly payments lower.

2. Zero-percent financing usually requires unblemished credit to qualify.  While some finance programs are moving to go after an expanded audience of buyers with less than perfect credit scores, the majority still require excellent credit. Buyers with less than sterling credit generally do not qualify for them. Stistaically, only 9 in every one hundred buyers will qualify.

3. Zero-percent financing is available only on a limited number of models in dealer stock, not on special orders or option packages.  Most zero-percent deals tend to apply only to the vehicles on the dealer lot and they may not include special option packages or premium models.  Car dealers know that buyers tend to fall in love with cars — not interest rates. So, once they see a dealer’s inventory, the particular model they may not feature the 0% deal that attracted them to the showroom in the first place.

4. Zero-percent financing is usually offered in an either/or situation with a cash rebate and you must choose between the two.  Most of the programs typically follow this formula. For most consumers, taking the rebate is the better deal.

5. If you qualify for zero-percent financing, negotiating a lower price on the vehicle may be more challenging.  Be sure to negotiate the deal before discussing or applying for the zero-percent financing. As always, we recommend you do your homework before buying.

So, you’ve fallen in love after the test drive, and now you find out that, guess what…zero percent won’t work for you. Most consumers will then take the path of least resistance and accept an alternate financing option from the dealership without much quibbling. That could take away one of the buyer’s key levers in the negotiating process: the ability to play one financing offer against another.

Once you have fellen in love with the vehicle, both the salesperson and the buyer are inclined to shift the focus of the discussion to the size of the payment rather than the interest rate.

Gary Pierce of Lending Tree Autos, an online clearinghouse for car loans, says consumers’ tendency to go along with the process shows up in his statistics. One out of 10 pre-approved Lending Tree deals doesn’t survive the negotiating process in the dealership; the buyer accepts a dealership offer instead. That’s a testament to the persuasive power of the salesperson and the environment.

It usually takes a competing offer from a non-dealership source to lead a dealer to come up with the best possible counter-offer. Consumers don’t normally reach that point unless they have a pre-approved offer  in hand as a bargaining chip. Getting pre-approved before you enter the dealership is fast, easy, and gives you the bargaining power.

Do your homework before you shop for a car, and don’t be fooled by offers that sound too good to be true. Usually, they are. If you would like advice or help an auto financing decision, MCT’s skilled loan specialists are ready to help. Simply call or stop by and we will help you find the best financing deal.