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That 0% Auto Loan from the Dealership Might Not Be the Best Deal
In seeking the best deal on your next car, you might’ve stumbled upon advertisements or offers to get a 0% interest auto loan. As great as this sounds, you may not save as much as you expect with this type of incentive.
Since auto loans can come through either a dealer or a lender, such as a credit union, it’s important to note that a 0% interest loan generally, if not always, is obtained through a dealer. Automakers offer them to attract buyers to certain car models, especially ones that aren’t selling well. Here are a few things to consider about 0% financing and why it might not be in your best interest to use it.
You might be forfeiting a better deal
Typically, you can’t receive both reduced rate financing and a cash rebate when you buy a car, so you may have to choose one. Manufacturers’ cash rebates can range from a couple hundred to a few thousand dollars. The well-known auto research website Edmunds found that the cost of incentives that automakers pay to attract customers was around $2,300 per car industrywide, which includes cash rebates and cost of reduced financing.
While a 0% loan may sound appealing, a cash rebate might save you more money. If you buy a $20,000 car that has a $2,300 rebate, you are really paying $17,700 plus interest. If your interest rate for a five-year loan is 3%, a typical rate, you will pay a total of $1,383 in interest. That brings the cost of the car plus interest to $19,083, saving you $917 compared with what you’d pay with a 0% loan. (Check out our handy Auto Loan Calculator!)
Rate may not last as long as your loan
Some car models may have 0% financing for a limited term, such as five years, which could be less than the length of your auto loan. In the third quarter of 2015, the average loan term for a new car was five years and seven months, and the term for used cars was five years and three months, according to Experian’s State of the Automotive Finance Market report. These are the longest average terms calculated since the firm began collecting data in 2006.
You may even receive a longer loan if you want lower monthly payments than you were offered initially. If your term is longer than the 0% financing deal, you generally pay interest on the remaining months or years.
This offer can be limited
A 0% rate might only be offered for a handful of models, especially newer cars, and less for used cars or older models. But even if this deal is available for the car you want, qualifying for it typically requires a high credit score. Check on the eligibility rules for getting this rate before stepping onto the dealer’s lot if you can.
As you sift through car prices and incentives, remember that trade-offs are part of the process when buying a car. Although a 0% interest rate may save you money in some cases, you might also be letting a better savings opportunity pass you by.
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Best places to research before buying a car
Purchasing a car is a big investment, one that demands considerable research of makes and models, consumer reports, incentives, financing, and more. While some people thrive in this environment, others are quickly overwhelmed and don’t know where to start, so we’ve rounded up some of the best websites to visit in order to prepare you for your next car purchase. Armed with your research, your short list of vehicle choices and features wish-list, you’ll be in the driver’s seat before you know it.
Car buying 101
Edmunds.com is ideal for checking out new car deals, styles, models, road test reports and best car lists. There’s also the ability to compare new cars, help finding a dealer, details on current incentives and rebates (advertised and non-advertised), car reviews, trade-in value, and pricing. Use the calculator feature to help you determine, based on the features analysis, what falls within a realistic range of what you can afford along with your current obligations.
Bankrate.com is another option that helps with budget analysis. It helps you decide whether to buy or lease or if new or used is a better choice. Should you choose the lower interest rate or the rebate? Overall, Bankrate.com is an excellent resource for comparing auto loan costs and payment goals. It can also be used to manage other areas of your finances and tie them all together for a consolidated view.
Mint.com, every budgeter’s favorite, gathers together all of your family’s finances and lets you see the big picture. It will clearly show you how a car purchase will impact your overall finances and help you to determine your maximum budget. Continue using it after your car purchase and you can track spending patterns, banking, investments, and other financial planning.
KBB.com reports information from Kelly Blue Book.You can access new and used car prices, trade-in and private party values, find dealers, search local inventory, see vehicle history reports, read expert and consumer reviews and the annual new car buyer’s guide. There’s also a payment calculator and up-to-date information about rebates and incentives. Because Kelly Blue Book is a respected authority in car values and has been a trusted resource in car buying for decades, dealerships tend to pay close attention to this information and tend to weigh their recommendations more heavily than most.
JDPower.com/cars is an especially good resource if you’re looking to research reliability. Power Circle Ratings from J.D. Power are one of the only sources of consumer ratings based on independent and unbiased feedback from millions of verified car owners. The site gives you access to new car ratings and awards, new car buyer guides, financing and insurance, the latest car news, and other tips and advice.
ConsumerReports.org’s annual car issue is another excellent source of independent product testing, research and rating by an unbiased third-party. It reports on new and used cars, offers information on car buying and pricing, maintenance, and car safety. It addresses the best and the worst cars, the most and least reliable cars, and notifies you of recalls. While you’re there, check out their Build & Buy Car Buying Service.
CarComplaints.com is not a car comparison site, but it has tons of brutally honest complaints from owners about things that have gone wrong with their car. Find out which cars you should avoid, which manufacturers have the largest number of complaints and which have the least. Read about current defect trends, Lemon Laws, horror stories and funny complaints. You’ll also find technical service bulletins, recalls, and vehicle history.
Truedelta.com is 105,000 car owners sharing real-world information about their car driving experiences. It’s part car research, part comparison site. Get different viewpoints on reliability, pricing, features and benefits. Ask members for suggestions based on priorities, needs, driver types, and other categories. Search reliability and price comparisons, query common problem reports, and review most wish-listed car features.
The manufacturer’s website will list some of the most detailed information on the vehicle you are interested in purchasing. It will include shopping tools, the ability to compare models, how to find a dealer and search their current inventory. Can’t find one that has everything you need? You’ll be able to build your feature and color specific car from scratch.
Time well spent
When making a big purchase, knowledge is key. Spend the time figuring out exactly what you want and what you can afford before heading into the dealership. The research you do will save you time and money when you ultimately make the best deal possible for you and your budget.