The current economy has been tough on auto manufacturers for the past few years. Due to this, they have developed ways to keep their sales steady. One of those methods is using incentives such as zero percent financing. It means that theoretically, you will not have to pay any interest on the car loan that you get from a bank. The automakers make money from the car itself not through the financing as they will still earn the same amount on the car deal. The only difference is that the payments will be spread over a longer period.
How zero percent financing works
This financial package is used as an incentive imposed on relatively expensive items so that customers can buy them. It’s only advantageous to the customer if he/she completes the payments during the promotional period which is approximately about six months or one year. Therefore, manufacturers that offer this kind of incentive depend on the probability that only a few buyers will clear off their payments during the promotional period. They anticipate gaining substantially from the higher interest rates imposed later on, on the remaining majority of the buyers.
Pros and Cons of Zero Percent Financing
Some of the advantages include:
- Quicker repayment.
The payments you make go strictly to the principal and not the interest. You can therefore decide to pay more than the stated minimum monthly installments. By this, you will have completed repaying the loan much earlier.
- Lower monthly payments.
With zero-percent financing, no interest is charged on you. Your monthly payments are much lower when compared to cash rebates while putting the period of the loan into consideration.
However, it also has some disadvantages to be considered. They include:
- Less choice
You may be limited to only the cars available in stock. It will limit your choice as you may have to sacrifice your preferences such as color and styles. Moreover, you may have to bear with unwanted options.
- Failure to negotiate
At times the zero percent financing appears like a very good deal. It even distracts the client from negotiating the price of the car. Unfortunately, this ends up as a burden because more money could be paid in the end.
- Credit rating
It can only benefit customers with an excellent credit score.
- Down payments
Usually, most dealers need you to make large down payments to offer you this incentive. If you have an obligation that is more on the present car than what the car is worth, this financing option will not apply to you.
- Shorter loan terms
With shorter loan terms, monthly payments are usually higher.
Weigh your options first by making a comparison before buying a vehicle. Also, ensure that you really need the car and that it fits your needs perfectly. Don’t be swayed by the good offer. Go through the pros and cons too and draw a wise decision. This type of incentive is imposed on expensive items to encourage the customer to buy.