Consumers Should Beware The 0% Financing Wolf
In Sheep's Clothing

Published in the Serious Buyer, Serious Seller Eletter, March 31, 2010, Written by Viraf Baliwalla

After the 9-11 terrrorist attacks, automakers implemented huge incentive programs in the form of 0% financing or large cash rebates to spur new car sales. The marketing gimmick took off like wildfire but it was a very costly promotion and they have been unsuccessfully trying to get rid of it since. The incentive program made people think they were getting free money when really it was a masked way to have the consumer pay for buying down interest rates.

"Sadly, most people have been fooled by the lure of free money and ended up losing thousands of dollars because they didn't understand what was really being offered" claims Viraf Baliwalla, President of vehicle buying service Automall Network.

Let's say you are buying a vehicle with an MSRP (manufacturer's suggested retail price) of $30,000. Let's assume there is an incentive for $4,000 cash rebate or 0% financing (but you can't have both). Finally let's say that the current bank interest rate is 6%. Since anyone can come in with their own financing through their bank, credit union, home line of credit or cash (all these are treated as cash payments), that means that anyone can buy the vehicle for $30,000 - $4,000 = $26,000. So the cash price is $26,000, however if you go through the manufacturer's 0% financing offer, you will be charged $30,000.

"I have spoken to many a consumer personally and when the subject of financing or leasing has come up, they get a glazed look on their face, their eyes go blank and everything thereafter seems to go right over their head" recounts Baliwalla. "If you ask them, 'do you understand?', they nod yes. But they really mean 'no, but I'm too embarrassed to ask questions or admit that I don't understand financing and leasing'".

Male car buyers, no offense, are their own worst enemy when this happens because they don't want to look bad in front of their wives or girlfriends. Women actually ask far more questions but unfortunately they often take in a male counterpart to handle negotiations and money matters.

Many buyers believed that by taking 0% financing in lieu of the rebate, it was actually free money. Why - because 0% was better than 6%, wasn't it? "There is nothing free these days especially in the car business" states Baliwalla." Salespeople are interested in one thing, selling cars. They are not in the business of customer education. If it is easier to sell a customer a car because they think they are getting free money, then the mentality is 'sign them up'".

Here is what's really happening. If you come in with cash, be it financed from your own bank or taken out of your mattress, you will pay $26,000. However, if you want 0% from the manufacturer's financing arm, then that means you are foregoing $4,000 cash that you are otherwise entitled to and they will use your $4,000 to put towards the monthly interest as it is incurred by the manufacturer's financing arm. You, the buyer, are paying $4,000 in interest upfront so you can pay 0% on a monthly basis.

Now, on the flip side, if you go to your own bank and pay 6% interest on a monthly basis, you are not paying $4,000 more upfront for the vehicle. So the big question every new car buyer should be asking themselves is, will I be paying more than $4,000 in interest if I go to the bank? If the answer is yes, then take the 0% or low interest financing. If the answer is no, then take the rebate instead.

"We work through the numbers every way so our customers can make the most informed decisions" says Baliwalla. The following example illustrates the difference.

Example Mfg Finance Own Finance
Price of New Vehicle $30,000 $30,000
Rebate $0 $4,000
Subtotal $30,000 $26,000
Term (months) 48 48
Interest Rate (annual) 0% 6.0%
Monthly Payment $625.00 $610.61
Total Paid Over Term $30,000.00 $29,309.32
Total Savings In Interest $690.68
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