Zero percent financing and cash-back rebate offers are as much a part of auto sales as gleaming showrooms and that new-car smell. The options also pose a dilemma for shoppers: Which one is better for their pocketbooks?
While the words “zero percent financing” can have a powerful tug when it comes to buying a new car, analysts say that option is not always the better choice. A buyer may be better off choosing the cash-back rebate in cases where the loan has to be repaid in 24 to 36 months. But zero percent financing that lasts five years or longer can be very attractive.
“It offers consumers interest-free financing, which is a lot of incentive. If they finance, it is better for them to take advantage of (zero percent financing over five or more years). They can save money. Normally the rebate is $1,000, $1,500 or $2,000, but the finance interest incentive averages $3,500 to $5,000,” said Obaid Nabizada, a finance manager at Hayward (Calif.) Nissan.
Of course, when it comes to buyers who pay up front with cash or a personal check, a cash-back rebate is the only option, he said.
Unlike regular car loans, in which consumers have the option of going to a bank or credit union, zero percent financing requires manufacturer-backed financing offered through car dealerships. In addition, a good credit score — generally 700 or above — is needed, which means most buyers who seek zero percent financing do not get it, said Liz Opsitnik, editor of AutoLoanDaily.com.
Zero percent interest loans typically are offered in the range of 24 to 36 months. However, 60-month or longer terms have recently become more available, and the longer terms were offered on 13 of the 20 featured vehicles included in a list of manufacturer-backed promotions running during the month of June.
“The deals with the 24 and 36 months, that’s one thing. Five years, that is unprecedented value,” said John Nakamura, general manager of the Albany (Calif.) Ford Subaru dealership. “Most of our customers are going for (60-month) zero percent financing,” he said.
Bill Benck of Napa, Calif., opted for zero percent financing over five years instead of a $2,500 cash-back rebate when he purchased his Ford Flex from the dealership a month ago.
“By going with zero percent financing, we’re saving about $6,000 (in financing costs). It allowed us to get a nicer car with more equipment,” he said.
Indeed, buyers who opt for zero percent over five years can really benefit, Opsitnik said.
“It keeps their payments low. It’s free money you can use for borrowing,” she said. “It stretches your payments over five years. You could take that extra money and put it toward a credit card balance or put it in savings. That’s the best deal around.”
But in cases where the zero percent financing runs for 24 to 36 months, the shorter repayment window can make for some pretty high monthly payments, even though no interest is being charged.
Case in point: Say a $24,000 vehicle offered zero percent financing over 36 months or a cash-back rebate of $3,000. If a buyer took the zero percent financing, he would have a monthly payment of $666.66.
That payment might be difficult for some consumers to manage, even though it saves them from paying interest on the loan, according to Ethan Ewing, president of San Mateo, Calif.-based Bills.com, a personal finance website.
“The automobile financing companies want to get their money back more quickly if you are going short-term,” he said.
If that buyer took the $3,000 rebate instead, applied it toward a down payment, then took out an auto loan from a bank or credit union with a 6 percent interest rate over 36 months, he would come out with a better deal.
Monthly payments would then be $638.86, based on the lower price of $21,000 paid for the vehicle.
(The example does not include taxes, delivery, registration, title and license fees or a trade-in vehicle discount.)
The picture starts to get brighter when the repayment term for zero percent financing gets longer.
If that same $24,000 vehicle could be purchased with zero percent financing over 60 months, the monthly payment would be $400.
Compare that with a 60-month loan with 6 percent interest rate, which would result in a monthly payment of $464, or $3,840 more over the course of the loan.
One drawback of zero percent financing is that it often is unavailable on popular cars. “It’s for the cars they want to get off the lot,” Ewing said.
Still, he added: “Zero percent can be a great choice. You have to do your math. The decision you have to make is to look at your monthly payment and make sure it’s affordable for your monthly budget.”
That said, if your credit score is not good enough for zero percent financing, do not automatically go for the cash-back rebate, Opsitnik said.
In some cases, a car buyer would be better off asking for a low interest rate financing deal offered by the manufacturers.
Depending on their credit scores, buyers who could not qualify for zero percent may qualify for low interest rate financing.
“You may qualify for 2 percent financing, so it still might be a better deal than cash back,” she said.
Whether you choose zero-percent financing, low-rate financing or a cash-back rebate, do not forget to first negotiate over the price of the car, Opsitnik said.
“They should negotiate for the price first before they start talking about payments or which financing they are going to take,” she said.
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