Nearly a decade ago, in difficulty automakers have begun to offer 0% financing offers for new car buyers.
The objective of these programs was to sell cars and car manufacturers hoped that 0% of the offers would do exactly that – and they were right.
Car buyers (currently on the market or not) flocked in automatic dealers in search of these funding offers. And although some are qualified for them, most did not do it. Once the buyer was in the dealer, the difficult sale has begun – to do almost impossible for the consumer to leave without a new vehicle – no matter if they qualified for the financing of 0% or not.
Are these 0% funding really beneficial? Perhaps? But, for the majority of automotive buyers, they really offer very little incentive – here’s why:
Most 0% funding offers are only 36 months (3 years). What is correct if you can afford a very high payment. Example, Ford offers a financing agreement from 36 months to 0% for their range of focus products. A Ford standard price is priced at about $ 17,000. Financing this vehicle, assuming 5% down, puts a payment of about $ 449 for 36 months to 0%.
A high monthly payment for a low-budget consumer. The only real benefit is that this vehicle buyer would not pay any interest on the life of the loan (provided that the reseller or the manufacturer has not constructed a level of financing in the price of the vehicle).
However, Ford also offers a financing of 2.9% for 60 months. The same vehicle (with the 5% decrease) at 2.9% for 60 months (5 years) sets the payment to approximately $ 290 per month.
Much more affordable for the consumer who seeks to buy a vehicle of this nature (which means that it is a lower price car, with limited features, intended for the low-income buyer – buyers to Low income that can not afford $ 449 a month in cars payments). But $ 290 is much more affordable than $ 449 per month (a monthly cash flow difference of $ 159).
The only problem with this financing transaction is that at 2.9%, the borrower (buyer of cars) should bear interest for the 60-month loan. But, what does this interest really cost?
A vehicle of 17,000, with 5% discount, at 2.9% for 60 months equals approximately $ 1,300 in funding (interest). If you have looked over more than 60 months, it is about $ 21 per month.
But, Ford also offers, on this same vehicle up to $ 3,000 of cash back (not applicable with the 0% financing agreement). This summary option would be more than covering the cost of financing – in fact, this repayment option would essentially pay the $ 1,700 borrower (in overall benefit) to finance the vehicle and do not agree with 0% . This represents $ 1,700 for the good of the buyer ($ 3,000 of cash back less than $ 1,300 financing fees are equal to $ 1,700).
It is interesting to note that this automotive buyer could essentially have their funding rate up to 6.9% for 60 months before $ 3,000 cash loss.
The essentials here is that 0% funding can be a good deal, provided other options do not offer better benefits. Instead of just looking at the funding rate (where 0% is always better than anything else), you have to consider all the offers and choose the one that makes the most financial financial meaning.