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It's one of the best-kept secrets of the car business: zero percent car financing, one of the largest discounts a consumer could hope for in an entire lifetime of conspicuous consumption, remains stubbornly beyond the reach of most car buyers. It is not unusual for an automobile maker to put zero percent deals on more than two-thirds of its vehicles; many are the equivalent of a $2,000 or $3,000 (or higher) rebate.

And the very idea of zero percent – with its subtext of getting something for nothing – lends itself to a simple yet powerful marketing message that car dealerships can promote in every medium, from cable TV to newspapers to Facebook. But, paradoxically, these deals can also squeeze out competing loans and pave the way for higher costs if a buyer isn't careful, experts say.

Hard To Get
Moreover, they aren't available to everyone. The programs exclude an estimated sixty percent of the car buying public. The reason: Buyers with less than sterling credit generally do not qualify for them.

"The people who are going to take advantage of zero percent (loans) are the ones who don't need it," said Mark Dubis, a Cleveland-based dealership consultant and president of The Dubis Group. "And the ones who do need it can't qualify for it."

Automakers are notoriously tight-lipped about what credit scores are needed to qualify for their best financing rates. But Michael Royce, a one-time car salesman and publisher of BeatTheCarSalesman.com, estimates customers may need at least a score of 680 to 700. Many buyers are already sitting across the desk from dealership salesperson when they find out they don't qualify – and that's especially likely if they have a mediocre-to-low credit score and haven't bothered to check it ahead of time.

Other issues complicate the deals. For one thing, buyers tend to fall in love with cars – and not interest rates. So, once they see a dealer's inventory, the particular model they want may not feature the zero percent deal that attracted them to the showroom in the first place.

And if they opt for a new model instead of a year-end example, the loan for the new one often won't carry the same four or five (or six!) year term – if the car even features zero percent financing at all. And most days, a few models feature zero percent deals that are for 36 months or less; relatively few buyers want terms that short, because the shorter term makes the payment that high. Still, consumer finance experts like three-or-four year terms, as they keep the total cost of a loan down.

Whatever the difficulty, buyers may be well into the buying process when they find out that zero percent financing won't work for them. So they may take the path of least resistance and accept an alternate financing option from the dealership without much quibbling. And that could take away one of the key levers in the negotiating process: the ability to play one financing offer against another.

Hard To Walk Away
A range of psychological factors come into play at that point, Royce says. Many people have a hard time exiting a sales discussion smoothly if their original plans fall apart. So they go with the flow. "That's the thing about the buying process," he said. "The dealership gets you with the test drive, and if they can get you to the desk after the test drive and you are excited, you are in the process and it's very hard to walk away."

At that point, both the salesperson and the buyer may be inclined to shift the focus of the sales discussion to the size of the payment – rather than the interest rate. Ultimately, that could lead them to a term as long as 72 – or more recently, 84 – months. "What they should do is go for the rebate, and then go for the shortest possible term," Dubis said. "Instead, they are going for the longest term and the lowest monthly payment."

With a six-year loan, the payment will likely end up lower than it would on a shorter term zero percent deal, but there's a downside; without a hefty down payment, the buyer will be 'upside down', owing more than the vehicle is worth for the majority of the contract. It's a nightmare scenario mirroring the housing crisis that brought the world financial system to its knees in 2008, although it must be admitted that 'upside down' on a $30K car loan is significantly less financially precarious than 'upside' down on a $300K mortgage.

The continuing debt load will never seem to go away, complicating the process of buying a new car down the road. Gary Pierce of Lending Tree Autos, an online clearinghouse for car loans, said consumers' tendency to go along with the process shows up in his statistics, too. One out of ten pre-approved Lending Tree deals doesn't survive the negotiating process in the dealership; the buyer accepts a dealership offer instead.

That's a testament to the persuasive power of the salesperson and the environment. It's also a sign that dealerships can be good sources of financing. They have long-standing relationships from a variety of lenders and can be especially helpful if a buyer has credit problems. But it may take a competing offer from a non-dealership source to lead a dealer to come up with the best possible counter-offer. "Hopefully, customers are getting a good deal in those cases, as much as we would like to be the one providing them with the loan," Pierce said. Consumers don't normally reach that point unless they have a pre-approved offer from a bank or credit union in hand as a bargaining chip, however.

Since automakers usually offer a choice of a rebate or zero percent financing, it may be best for consumers to take the rebate and use the financing they arranged themselves for the purchase. In this way, they shave thousands off the price of the vehicle and get a relatively low interest rate to boot.
"Most of the time when people crunch the numbers, you are better off getting your financing at the credit union," said David Adams, CEO of the Michigan Credit Union League.

So is it 'game over' if buyers fail to get financing in advance? Not necessarily, Adams said. They can still turn the situation to their advantage. While dealerships tend to steer consumers to an affiliated lender to make a higher commission on the loans, "virtually all dealerships have relationships with credit unions," he said. "So you need to be smart enough to say, 'What about a credit union option?'"

Consumers won't fare well if they blindly put their trust in advertised low-rate deals. While zero percent offers can definitely save well-qualified buyers money, they basically exist for a different reason: Automakers need these deal sweeteners to sell enough cars to keep their factories humming.
Nearly every automaker, from Acura to Volkswagen, is offering them these days. Their dealers don't have it particularly easy. Amid the cutthroat competition, their profit from the actual sale of a new vehicle is razor thin – if a profit exists at all. And they make less money on the zero percent financing deals than they would on their financing, Royce said.

While dealers do need to make money, consumers need to be on their toes so they aren't making an excessively generous contribution to their dealer's revenue goals. Otherwise, they could end up paying a few thousand dollars more for their car than the next guy driving off the lot.

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