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January 05, 2009

The Cost of Zero Percent Financing

If we’ve learned anything in the last year, it’s that we don’t get anything for nothing. If it’s good, it probably won’t stay good. If it’s too good to be true, it’s probably a trap. So what about zero financing? Now that we’ve bailed out both GM and GMAC, the latter is offering zero percent financing on the former’s cars – and presumably with our money. Should we  snap it up?

Probably not but maybe. At the bottom of the post, if you’re on my website, you’ll see a handy dandy calculator to use in evaluating the deals a dealer offers you. If you’re reading this post in a  feedreader or an email, the calculator probably won’t show up but you can still access it at http://blog.tomevslin.com/zero-cost-calculator.html.

Obviously there’s a cost to zero percent financing. The dealer and/or the manufacturer pay the finance company the interest which you’re not paying. One way or the other, some or all of that amount gets tacked on to the price you pay for the car. Often there’s a cashback rebate you don’t get if you take advantage of the zero percent financing. You may also be able to negotiate a lower price for a car if the dealer is not making a contribution to paying down the interest rate.

For example, suppose you’re looking at a $30,000 car. You’re planning to make a $3000 down payment. The salesman says he’ll sell it you for twenty-nine thousand (such a deal!). If you don’t take the zero percent financing and pay cash (which you know you can borrow at the bank for  6.5% APR on a 48 month loan), you’ll get a $4000 cash rebate. Which is the better deal?

In this case you’d save $21.82 every month by applying the rebate to the down payment and taking the bank loan. The actual APR on the zero percent financing is 8.77% hidden in the rebate you’re not going to get.

On the other hand, if you were only offered a two thousand dollar rebate, you’d better off by $35.44/month if you do take the dealer financing which has an actual APR of only 4.05%. Of course if could get the saleswoman to reduce the after-rebate price to anything less than $25,923.53, you’d be better off using the bank financing. She just might do it (after the obligatory talk with the manager) depending on how much of the cost of the zero percentage loan the dealership is paying.

Here’s the calculator: an informed negotiator is a good negotiator. Good luck (if you don’t see the calculator below, look here).

Please supply either bank APR or cash price for car or both as well as all required fields.


Price at which dealer will sell car with 0% financing (required)
Price at which dealer will sell car for cash net of any rebates
Amount of down payment you intend to make (required)
Percentage APR of loan from bank
Loan duration in months (required)

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