5 car finance traps to avoid

Doesn’t this sound like a steal: zero percent finance when you buy a new car. For those looking for the best deal on car finance, a 0% comparison rate is far from perfect. In fact, zero rarely means “nothing” and it certainly doesn’t mean “free.” Zero percent finance rarely means you are getting the best car finance deal on the market.

Many people believe zero percent finance means this:

  • You buy a car in the usual way;
  • Get 0% finance, and;
  • Pay off the principal until you’re done.

Think that’s what happens? Think again.

How they come up with “0% interest rates”

Car manufacturers or dealers offering zero percent finance are really just doing some creative accounting. For starters, a majority of dealers offering zero percent finance are essentially taking out a “sub-vented lease.” This means your monthly repayments are subsidised by a larger residual value or balloon payment.

The bait

The bait car dealers often use is urgency. “One time offer!” or “Hurry, you’ll never see these prices again!” Of course, dealers repeat one time offers every few months and you definitely see those prices again. To the untrained eye, 0% finance sounds a lot better than a market-competitive 8% comparison rate. “Zero” coupled with “limited time only” can be a tempting lure.

The hook

Dealers want to get particular cars off their lot, especially if they’ve already paid for them. The hook for would be car buyers is this:

  1. The car buyer has his or her heart set on one particular model the dealer is offering.
  2. The dealer offers zero percent finance to entice the buyer off the fence.
  3. The buyer accepts and the dealer makes a sale.

But what happens to the buyer?

The sinker

In the terms of most “zero percent” finance deals, the buyer can’t negotiate for a better price, nor can they trade in their existing vehicle to offset some of the price.

Worse still is dealers might trap buyers into longer payment terms. Then, they’ll have to sign up for a balloon payment. This lump-sum payment is due at the end of the loan. This may be as high as 30% of the purchase price!

Why anything above zero is better

Zero might be a great temptation, but it’s far from the best deal out there. (It’s probably one of the worst!) You should always directly compare monthly repayments side-by-side, using a comparison rate table.

Shopping around for better car finance rates from reputable brokers is always a better alternative.

Financial professionals who live and breathe car finance fight hard finding the best deal for your situation. Dealers only care about their bottom line. Think about it – when it comes to getting you the best loan deal, who is really in your corner?

This post was produced in collaboration with Savvy Finance.

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