Zero Percent Interest

Interest Rates ⇦ Zero Percent Loans ⇨ Check Loan

Zero Percent Finance – doesn’t exist!

Don’t get taken in by zero percent finance – it’s meaningless – IT DOESN’T EXIST !!

Well… yes, ok, if you have got zero percent finance before, you WILL see on the loan agreement that, technically, there is NO interest on the loan – you borrow £10000 and you pay back £10000. But just think about it for a moment… would ANY company lend money for nothing… do you EVER get something for nothing?

It just doesn’t happen. Try going to your bank and asking for a loan at zero percent and see how far you get. It’s ridiculous!

No finance company is going to do this either. Even when the dealer is using the manufacturers own finance company (eg, a Ford dealer using Ford finance) it still won’t happen. If a car manufacturer has their own finance company, it is just that, a separate company. It is accountable and has to make a profit. They don’t lend money for nothing just so the dealers can sell lots of cars! They are not a charity set up to help the “poor” car dealer!

So, as far as you are concerned, a loan at zero percent interest means that you pay no interest – you borrow £10000, you pay back £10000 over the term. However in reality, as far as the loan company is concerned, when they lend money they want interest… they HAVE to show a profit.

Where does this profit come from? Who pays the “interest” – the interest that is not shown on your agreement? You? Or does the car dealer pay it for you because they love you so much?

Both, actually. The car dealer pays the finance company “behind the scenes”, separate from your loan agreement. Maybe they go without their commission and/or physically pay them in hard cash. Either way, the car dealer ends up paying the interest on your loan! How can they do that?...

… It comes out of your pocket. The dealer will have already factored the cost of the finance into the overall deal they are giving you. It may be that they have already increased the price of their car to cover it. It may be that they actually give you LESS than the Trade price for your car. It may be that they give you NO discount at all on the car they are selling you… or any combination of these.

In other words, when you get finance at zero percent interest, you will have to borrow MORE than you would if you got the loan at a normal rate:

If there were two identical cars, in different dealers, one available at zero percent finance and the other at a normal interest rate you would end up paying the same per month whichever you went for. (All other things being equal – you negotiated equally as hard in both dealers’ etc)

Don’t attach ANY importance to zero percent finance – it is simply yet another method that dealers use to make you think you are getting the best deal from them. There is nothing wrong in getting a deal at zero percent - just as long as you bear all this in mind and that the offer of such a deal DOES NOT pull you towards a particular dealer.

If you find a car that you really want to buy and the dealer happens to be offering zero percent loans... fine. However, if the car you want is at a different dealer offering a normal interest rate… go for that. One is no better than the other.

The simple facts that you must always bear in mind are these:

* your car is worth its Trade price and no more (see Car Valuation)
* the dealer will be selling you his car at (at least!) full Retail price
* it COSTS money (interest) to borrow money

There are SO MANY ways that the dealer will disguise what is happening and they do this simply to fool you into thinking that you will get a better deal from them than you will elsewhere. You will see adverts like…

1. “Manufacturer subsidised, three year’s interest free finance”
2. “Get at least £x thousand for your old car”
3. “No deposit and get £500 cash back on the deal”
4. “Free this, free that or free the other”

All simply strap lines designed to draw you in. The truth is…

1. There is no such thing as interest free finance
2. You get the trade price for your car, full stop
3. You will have PAID for any “cash back” that you get
4. Anything free will have already been factored into the deal – you will have already paid for it

Unfortunately, there is no Law to stop dealers from manipulating figures; it would be too hard to prove even if there was. They can put down any figure they want and say that’s how much they gave you for your car. They can put down any figure they want and say that’s what they charged you for their car. They do this to make you believe you are getting something special – YOU ARE NOT!

We should really mention more about free stuff…

Free: - insurance, warranty, breakdown cover? No, YOU pay!

You often see adverts for cars where they say they will give you “1 year’s free insurance”, “free warranty”, “1 year’s free AA breakdown cover” etc.

This falls into the same category as zero percent finance – anything you get “free” will be paid for – BY YOU! Nothing is free. For example: if it costs them £200 to give you one year’s “free” insurance, they will make sure that they get this £200 from you by giving you less for your car, or charging you more for their car, or selling you a less than favourable finance deal where they make extra money.

You NEVER get something for nothing!

As we have said, car dealers want/need to make the maximum possible profit from every car they sell, so they are not going to start “giving” you things that cost them money – are they! In fact, to squeeze an extra few pounds profit from a deal, they often go to the trouble of cashing in the car tax disk on your part exchange – and then obviously charge you for taxing the car you are buying from them.

When someone part exchanges a car with a few month’s tax still to run, they can get an extra £50 or more by cashing this in. Not much on one deal… but consider if the dealer sells 20 cars a week, they are making an extra £1000 a week – just by cashing in the tax disks on the cars they take in part exchange.

Every pound profit counts and you WON’T get stuff free – you will be paying for it, one way or another – so DON’T be swayed by zero percent finance or other "free stuff". It’s just another way of manipulating you into thinking you are getting a better deal!

The next section explains how you can check a loan to make sure you are being offered a good finance deal.

Interest Rates ⇦ Zero Percent Loans ⇨ Check Loan

© Car Buying Guide 2007 - 2024