Understanding Dealer Financing

If you’re a savvy enough consumer to wait until dealers are desperate to sell, you owe it to yourself to wait just a little bit longer to do your research on financing options. Don’t be fooled by dealer promises of zero percent financing. Let’s take a look at four hidden costs that come with these advertised low rates.

First, you may not qualify for 0% financing. Car commercials don’t talk about the fine print, but dealers place a pile of restrictions on 0% financing. If your history with credit is anything less than perfect, don’t expect to qualify for these rates. Roughly 60% of people who apply for those loans get rejected.

Second, these loans are usually short-term. If the dealer is offering 0% financing over the life of the loan, expect it to be no more than three years. This means a much higher payment than you’d have on a five- or seven-year loan. Additionally, many 0% financing offers only cover part of the life of the loan – usually 6 months. After that, you’ll be paying more in interest.

Third, dealers may use the promise of 0% financing to trick you into paying more for the car. With their knowledge of your financing options, they can manipulate the price of your trade in and the cost of the transaction to arrive at a monthly payment you’re happy about. That way, you’ll focus on the cost of the payment, not the price of the car.

Fourth, and most importantly, choosing 0% financing will usually prevent you from taking advantage of other discount options. 0% financing is offered instead of manufacturer rebates and other discounts. Also, these financing packages are usually incompatible with special discount programs like Ford’s Friends and Family package.

This last hiccup can mean 0% financing is actually more expensive than a loan obtained through a credit union, like Horizon. To see this effect, let’s take a look at some numbers. We’ll assume that you’re paying $20,000 for a car. You’re presented with two choices. You can take 0% financing on a three-year loan or you can get a 4% interest rate on a five-year loan from Horizon Credit Union, plus a $2,000 rebate. Let’s see how those options break down.

If you take the 0% financing option, your monthly payment will be $555. Assuming no other fees or problems, you’ll pay $20,000 over the lifetime of the loan. Your payments will be higher, and if you can’t make one of them, you’ll be paying more in interest next month (in addition to all the months that follow).

If you take the rebate, though, your monthly payment will be $331- a much more reasonable amount. Over the lifetime of the loan, you’ll pay a total of $19,890. That means you will save $20 and have a lower car payment.

Even if it’s not incompatible with cash back incentives and other rebates, having outside funding lined up before you go to the dealership can be a tremendous advantage in negotiating. By continually postponing questions of financing, you can let the dealer think there’s still money to be made. This position might lead them to give you more on your trade-in, lower the price of the car or offer you more options.

The loan you get to pay for your car may be the biggest financial decision you make outside of your home. You owe it to yourself to do your research and treat this momentous decision with diligence. You wouldn’t buy a car just because it had an enticing price tag. Why would you do that with a loan?

Remember, dealerships make money from financing. They want you to finance your car through them, because it’s one more way for them to profit from the sale. It’s also one more piece of information they can use to manipulate the total price of the car in their favor. You can take that power away from them by doing your research on car financing.

If you’re considering buying a new car, your first call shouldn’t be to the dealership. It should be to Horizon Credit Union. Our experienced staff can answer any questions you might have about auto loans and other options to finance your new car. Buying a car is one situation in which that old cliche` “knowledge is power” really is true. Take the time to educate yourself about your vehicle financing options.  Your wallet will thank you for it! Call Horizon Credit Union today.