Opening Insights
In the market for a new car and comparing interest rates? The inevitable task of shopping around for the best rates so you don’t overpay, is just as important as finding the right vehicle.
So when a car manufacturer offers a “0% interest rate”, it’s hard not to jump straight into a deal.
In short, 0% interest is a type of loan that does not require interest to be paid back over the life of the loan. This means only the upfront financing costs are repaid to the lender. But don’t be fooled, 0% interest is not as simple as it sounds, and often comes with a ‘catch’.
Common catches that many buyers will later discover are inflated pricing on the vehicle, a short 0% interest promotional period after which a much higher rate applies, or possibly high fees and charges incorporated into the loan contract. So if you think a 0% loan is going to give you the best deal, you might want to think again.
To ensure you understand the true cost of 0% interest, and how to find the best car loan rate, browse this comprehensive guide of common ruses in the car financing market.
Hidden Fees
When choosing a car loan, 0% interest sounds great. It sounds like you’re getting a cheaper deal. But the truth is, lenders have to make their money somehow, so where are they picking up the extra bucks when you’re skipping out on the interest?
Hidden fees catch many people off guard. These fees can include a higher purchase price for the vehicle, lack of flexibility over the price, a low price on your trade-in vehicle, a shorter loan term resulting in higher repayments, and balloon payments.
Other tactics that are used to squeeze out more money can also include a compulsory servicing arrangement with the dealer to maintain the vehicle’s warranty (when you’d likely be able to get your car serviced cheaper elsewhere). And these examples are just the tip of the iceberg, each contributing to the purchase price to help compensate for the lack of interest payments.
After sifting through the hidden fees associated with 0% finance, there is usually a better option for financing your vehicle.
Introductory Period
When exploring the idea of a car loan with a 0% interest rate, it’s important to dig deep and read the fine print. Often the 0% rate only applies to the first six to twelve months or 12 months to 21 months. After this introductory period, the interest rate will revert to a higher rate which will enable the lender to recoup the money that they lost in the introductory period. So while 0% interest sounds like a good deal, the true cost is actually built into the price of the loan and can result in you getting a pretty poor deal.
Credit Score Impact & Eligibility
Your credit score is your reputation as a borrower. It determines many aspects of your life including whether you can get a new credit card, a mortgage, or be approved for a car loan. So it’s important to maintain a good credit score to ensure you can borrow money now and in the future.
In getting approved for a 0% interest loan, your credit score highlights your repayment history to a lender. Typically only applicants with high to extremely high scores will be successful.
If you have a standard credit score or lower, chances are you won’t be approved for a 0% interest car loan. Some actions that contribute to a low or bad credit score include missing monthly repayments, paying monthly repayments late, defaulting on payments, entering debt agreements, declaring bankruptcy, and frequent credit enquiries.
How to access your credit score
Individuals are entitled to receive a number of free copies of their credit report every 3 months. There are companies that advertise a fee to provide a copy of a credit report. Before jumping in for those services, it may be advisable to consider your free options first. The Federal Government MoneySmart website provides information on where to access a free copy of your credit report. This information includes the contact details for several credit reporting agencies.
Minimum Payments
For any loan, typically there will be a minimum payment requirement that the borrower must meet. That is, the lowest amount of money you can pay each month to satisfy the terms of the loan.
For a 0% interest loan, the catch of the minimum payment requirement is the amount you must repay each month is higher because it allows the lender to recoup the full amount of the loan within the loan period. So be aware that if you are looking to secure a 0% interest car loan, your minimum payments will be much higher than if you were repaying a loan with interest.
In addition to the minimum payment requirement, if you miss even one monthly payment - you will most probably be hit with a new sky-high interest rate, including some other fees and penalties.
Closing Thoughts
In sum, 0% interest car loans are just not worth the hype and tend to benefit the lender more than the buyer.
Unless you are in a stable financial situation where you know you can meet the strict repayment schedule and minimum payments within the loan term, a 0% interest deal could end up costing you more.
There are so many strings attached to 0% interest loans with hidden fees, the introductory period, credit score, eligibility, and minimum payments just scratching the surface.
To be plainly simple, if you think you’re saving money by opting for 0% interest, you are kidding yourself. If you really want to avoid paying interest - purchase with cash! You’ll pay absolutely no interest and won’t have to deal with any kind of monthly repayment schedule.
Secure Your Next Car Loan With Terms That Work For You.
Jade Finance is focused on securing the best loan for you which is why we do not offer 0% interest car loans.
As specialists in motor vehicle lending with over 25 years of experience and accredited with over 80 lenders, we are committed to providing our buyers with the lowest rate achievable across the market to suit their profile. In short, we work in our customer’s best interests.
If you are considering a 0% car finance deal, we encourage you to first speak with us for more information and for an alternative cheap rate option by calling 1300 000 008, or Request a Quote online.
