0% APR Loan Deals – Good Deal or Not?

0-apr-dealsCar makers are offering 0% APR loans (zero percent interest) as incentives on many makes and models during these times of slow car sales. Sounds great. But is it really? Is it better to take cash back, if offered?

Let’s take an example in which you agree to buy a car and finance $15,000 for 48 months at 6.70% APR interest rate.  Your monthly payments will be $357.11 per month. The total of all your payments for the life of the loan will be $17, 141. This means you are paying $17,141 – $15,000 = $2141 in interest, or finance charges.

Now, if you find a 0% APR interest loan deal for the same car, same price, you would pay only $312.50 a month and save $2141 in total cost over the life of the loan. You would be paying no interest and every cent of your monthly payment would be applied to reducing your loan amount.

Not a bad deal, right? Right. But maybe not the best deal.

Most 0% APR deals also come with an alternative cash back rebate deal. Typically, you can take one or the other but not both. If you take the cash back rebate, you must finance your loan at normal interest rates.

But, remember, the amount of your loan is less if you accept the rebate, even though you pay a highr interest rate.

Is it better to take the 0% loan, or the cash rebate?

To find out, compare the savings of a 0% loan to a loan at normal interest rate that includes the rebate amount.

First, simply divide your loan amount by the number of months in your loan. This produces your 0% APR no-interest monthly payment.

Second, use an online auto loan calculator (http://leaseguide.com/car-loan-calculator) to calculate your monthly payment at the normal interest rate, after you subtract the amount of the rebate from your loan amount.

What is the difference in monthly payment amount?

In our example above for a $15,000 car, our payment with the 0% APR loan was $312.50.

Assuming the car maker is offering an alternative $2000 rebate, that would reduce the loan amount to $13,000. Calculating our monthly payment, we find that the payment would only be $309.49, which is less than the 0% APR deal.

In other words, accepting the rebate gives you a lower monthly payment than the 0% loan.

If the car manufacturer is offering more than $2000 rebate for this deal, it becomes even sweeter.

Generally speaking, it is nearly always better to accept a rebate than a 0% loan deal if you have that choice, and if the rebate is more than $2000. This is especially true if you are short on down payment money because the rebate acts as a down payment.

See the following article, Best Car Rebates, to find out which car brands and models have current rebate deals.

Credit is important

To get a 0% financing deal, a customer must have good credit, where there is no such requirement for a rebate. So, if you think you want to go with the 0% rate option be sure to check your current credit scores first.

What’s your FICO® Score? Find out now with a purchase of your Experian Credit Report for $1 with enrollment in Experian CreditWorksSM!

In summary, don’t automatically assume that a 0% APR deal is better than a rebate. In many cases it is not. Do your math before you decide and you may be surprised at the results.

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