0% Auto Loans is Like Getting Free Money

Major automakers have a financial company set up to handle Auto Loans for purchases made at their dealerships, they will frequently offer Low Auto Loan Rates to convince more consumers to purchase vehicles. Sometimes, these rates even go as low as 0% APR. Getting a No Interest Auto Loan is essentially like getting free money.

Not only do you avoid paying interest, you actually end up paying less than the agreed upon price of the vehicle when you take into account the time value of money. Look at it this way: if you were to purchase a car with cash, you would avoid interest, but the money would be gone. However, with a zero percent loan, you can avoid interest while investing the excess money and getting a return on it before paying off your automobile loan. Essentially, a 0% loan offers the best aspects of buying a car with cash and buying a car with a loan.

0% Auto Loans or Cash Rebate

The attractiveness of a no interest loan is fairly obvious, so if that choice is available why should you consider any other option? At times, the automakers will offer a sizeable cash rebate as an alternative in place of the 0% loan. In some cases, the final price with the rebate may be a better deal in terms of the time value of money, depending on a variety of factors.

This includes the price of the vehicle, the length of the loan, and the amount of the down payment. In most cases the wise decision is to take the 0% loan if it is there. However, you may want to look at the net present value of the total payments for each option to make sure. You can ask the dealership to calculate these figures and their financial staff should have no problem presenting them to you.

Are there any negatives to a no interest loan? In regards to the loan itself, there really are no negatives. However, there are distinct disadvantages to this type of loan, including the credit requirements, length of the loan and purchase price of the car. Credit Requirements In most cases, 0% auto loans are only available for "qualified" buyers. This means individuals who have a credit score of at least 700 or higher. In fact, in some cases, the credit requirements may be even more stringent and require a credit score of 720.

Unfortunately, the majority of individuals purchasing a new car do not have credit scores this high. As a result, they will not qualify for the 0% auto loans and instead will only qualify for loans charging interest. However, the upside to this is usually 0% auto loans do not qualify for loan rebates either, so getting a car loan with interest places that advantage back with the buyer.

LOAN DURATION

With some regularity, 0% auto loans are very short car loans when compared to car loans with interest. The average length of a 0% car loan is 24 to 36 months. Compare this with other loans that often have a length of 48 to 72 months. As a result of the short duration of 0% auto loans, the monthly payment is extremely high, putting it out of reach for most borrowers.

AUTO PURCHASE PRICE

Probably the largest disadvantage of 0% auto loans is the ultimate car purchase price. Very often, dealers will push the price all the way to the upper limits of the MSRP, (or Manufactured Suggested Retail Price,) which raises the monthly payment even higher. Far too often, borrowers believe they are getting a good deal since they are not being charged interest on their car loan. Unfortunately, they do not realize that they are paying top dollar for their new car, despite not paying any interest on the loan. Even more problematic is that many dealerships do not encourage negotiation on the purchase price with this type of loan.

MONEY DOWN

Research the required money down for any 0% auto loan. This will help you to understand exactly what is required of you from the company. Some lenders will require that you put up to 25% of the cost down for the loan. To use a simple example, if the purchase price is $30,000, then the down payment requirement would be $7,500. For some, this will be too difficult to make the 0% interest worth it.

Keep in mind that very often, auto manufacturers limit the models for which 0% auto loans qualify - usually to the higher end luxury models of their line. As a result, the down payment could be substantial.