What is the benefit of 0% financing on a four-year term for a new car?

I have been offered 0% financing on a new car, but one auto dealer says the 0% doesn't matter. 

Lisa, Bolingbrook, Ill.

Zero percent financing means that you don’t pay any interest on the car loan. This is a great deal if you qualify for the offer — it typically applies to people with top-tier credit scores — and if you can find the right car with the zero-interest incentive. Some automakers limit the offer to slow-moving inventory or older stock. The loan term is typically for three to four years.

Let’s take a look at the 2008 Chrysler 300, which offers zero percent financing to qualified buyers for 36 months. With a $25,150 MSRP and zero percent financing, you would pay $25,150 over three years — if there weren’t any taxes, dealership fees, down payments, trade-ins, etc., to alter the price. 

In the same situation with 6.49 percent interest — which is the national average for new cars — you would pay $27,745 over three years. The 6.49 percent interest rate adds $2,595 to the overall cost of the car. If you spread the loan over five or six years, you’d get lower monthly payments but a higher overall cost.

The monthly payments with zero percent financing for 36 months would be $698.61, but the payments for a five-year loan with a 6.49 percent interest rate would be $491.97 a month. Although the lower monthly payment is enticing, you’d end up paying more for the car in the long run than with zero percent financing.

Be sure to compare incentives to find the best deal. There’s also a $3,500 cash-back rebate available on the 2008 Chrysler 300. In our hypothetical situation, the $3,500 would be a better deal than saving around $2,600 through the financing offer. Keep in mind that you can’t take advantage of both offers. You can use the Cars.com Auto Loan and Car Finance calculator to add up your particular situation. 

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Answered by Joe Bruzek on September 12, 2008 in I'm Just Wondering , What Does This Mean? | Permalink

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