Nowadays, new car finance deals are a dime a dozen each promising to save you the most money. You’ll find plenty of 0 percent finance car deals in Australia that may sound great, but are they really the best car loan out there?
With top car manufacturers like Toyota, Hyundai, Honda, Ford, and Nissan all giving out 0% interest deals, it's tempting to take them up on their offer. However, you could end up paying more for your new car with a 0% interest loan.
Before you take up any loan, you need to know what you’re getting into. Read on to learn more about 0% car finance deals and what you need to do to get the best deal on your car loan.
What is a 0% interest car loan and how does it work?
A 0% interest car loan or interest-free car loan is exactly what it sounds like. It is a loan with a 0% interest rate or a loan you won’t pay interest on. Now, it may seem like you’ll be saving a ton with a 0% interest loan, but in most cases, the dealer could charge you a higher price for the car or add extra fees to your repayments.
For most companies, the 0% car finance deal is usually a marketing tactic designed to get buyers to act quickly. Instead of taking your time and shopping around, you’re rushed to close the deal. You may end up paying more for your new car with a 0% car finance deal compared to if you went with an independent broker like Aussie Car Loans.
The difference between 0% car finance and other loans
In a standard car loan, you make payments on the principal loan amount (the original amount you borrowed) along with interest and fees. With a 0% interest car loan, you only pay back the principal amount without interest. However, there are built-in fees and charges you’re still obliged to pay on a 0% interest car loan.
The catch: Drawbacks of 0% interest car loans
Paying 0% interest on a loan sounds too good to be true, and for the most part it is. There are a couple of disadvantages when you take a 0% interest car loan. Keep these drawbacks in mind when figuring out which loan is right for you.
You might not get the car you want
Not all car models can be purchased with a 0% car finance. Dealerships offer the 0% car loans for select car models only. Often, it’s the less popular models or previous years’ models. If you’re eyeing a specific car model that’s newer or sought-after, you may not get it with a 0% car finance.
You may pay more for your new car with no room to negotiate
If you walk into the showroom and ask for the 0% car finance deal, the price of the vehicle can be inflated and is often not negotiable – you’re paying full retail. To make sure you’re getting a good deal, do you research beforehand. Check out the market value of the car you’re eyeing and see if it matches the price at the dealership.
Conversely, you can almost certainly negotiate a better price with the dealer if you’re not asking for the 0% finance option.
Low trade-in value
When trading your old vehicle, you’ll probably get a much lower offer for it with a 0% financial deal. This is likely because the car dealership wants to make up for the no interest repayments in another way. Instead of trading in your car, it might be better to sell it privately. Going the private sale route is going to take much more effort on your part.
High downpayment requirements
Another catch when it comes to 0% car financing is the downpayment you’re required. Because you’re not going to pay interest on the loan, a lot of dealerships seek to balance that out by requiring a large down payment so you can qualify.
Alternatively, a large balloon amount may be required to pay at the end of your loan term. You will need to make sure you factor this into your budget as this could make purchasing a new car that much more challenging.
Shorter loan terms with no flexibility
With a 0% interest car loan, the term may be much shorter compared to a traditional car loan. A 0% finance contract is often offered at a shorter term as dealers want to pay it off faster. This means higher repayments depending on your deposit or balloon amount.
High fees and penalties for missed payments
Make sure you thoroughly review any monthly maintenance or management fees as the dealership may be making up for the little-to-no interest this way. Also, if you miss a payment on your 0% car finance, you could see hefty penalties compared to a traditional car loan.
What is “Guaranteed Price on Future Trade-In"?
Another option offered by some dealers is a “guaranteed price at future trade-in” against your next new car. If you follow the dealership’s terms, then you’ll get a set value for your car regardless of depreciation when you trade it in to the same seller.
From a sales point of view, this is the same as locking you into buying your next car from them as well. The problem with this is that the cost of offering this guaranteed buyback price is generally an upfront loading to the cost of the car. And often these deals come with restrictions that may preclude you from taking up the offer anyway when it comes time to upgrade.
Do your homework and brush up on car values before you go into the dealership. You need to have a clear idea of the value of your current vehicle if you’re trading it in, as well as the price you should be paying for your new car. Half an hour researching car prices on online car sales sites will pay dividends here.
Getting the best deal on your car finance
If you want to get a real deal on the finance for your next vehicle and not get yourself into a 0% lemon of a deal, try the following approach:
Ask how much the total repayments on the loan will be
This takes interest rates out of the equation and gets down to the brass tacks of how much you will actually be paying in the end including any fees, balloon payments, and the like.
Ask straight up if the price of the car is negotiable
Knowing early on if the interest rate is tied into the price will save you a lot of time and give you clear expectations. You’ll find out whether the deal is too good to be true if you can’t negotiate the price as well.
Shop around when it comes to car finance
By shop around, we don’t mean that you should apply for loans with multiple lenders (this can be bad for your credit rating). Instead, look at getting pre-approved with a finance broker before you go shopping so that you can negotiate a suitable deal and compare it with the 0% finance that the dealer is offering.
Be prepared to try and negotiate with the dealer
While they might not budge, it’s a good idea to ask anyway. Be prepared to walk away! If the deal isn’t good for you, don’t be pressured and simply leave it on the table.
The best way to see the difference of a 0% interest car loan versus a traditional car loan is by checking it out for yourself. Use our car finance calculator to get an idea of your repayments and the current comparison rate to better inform yourself about what a standard finance arrangement might cost you. You can also go over more car buying tips and tricks here.
Need help figuring out which car loan option is right for you?
For more information, you can talk to us about car finance on your next new or used car to make sure you’re putting the best foot forward. Give one of our friendly staff a call on 1300 889 669—we’d be more than happy to help!
FAQs
What is zero percent finance?
Zero percent finance means you won’t have to pay interest on your loan. Car dealerships and manufacturers typically offer this type of loan on select car models to entice customers to buy.
How does zero percent finance work?
Similar to a standard loan, you’ll have to may regular monthly or fortnightly repayments on your loan. The difference with a zero percent finance is that you won’t be paying interest on your repayments.
Who is eligible for zero percent finance?
To be eligible for zero percent finance you usually need to have impeccable credit history and great credit.
Are there any fees associated with zero percent finance?
The short answer is: yes. There are fees associated with zero percent finance and they could be much higher compared to a standard car loan.
How long are the loan terms for zero percent finance?
Zero percent finance have much shorter loan terms compared to standard loans. You can expect your zero percent finance to have a loan term of around six months to three years.
Can I negotiate the price of the car with zero percent finance?
With this type of loan, it’s highly unlikely that the car dealer will let you negotiate the price of the car. In some instances, you might pay a higher rate for the car with zero percent finance.
Is zero percent finance always the best option?
No, zero percent finance isn’t always the best option. It has a lot of disadvantages and could lead you paying more compared to a traditional car loan. The best way to find the best loan for you is to do your research, shop around, and see what loans are out there.
