The thought of getting a car and slowly paying off an interest-free car loan surely sounds like a dream - but it’s not all it’s cut out to be.
Let’s be clear, we’re not here to rain on your parade.
Instead, we feel it’s our job to tell you the truth about zero-interest car loans and what they entail, to ensure you get the best car loan and financial support possible.
Firstly, how do interest-free car loans work?
These loans are typically offered directly from car dealers and not the car manufacturers themselves.
They are commonly used as sales tactics to make your desired purchase look like a good deal. Here’s the unfortunate truth about these zero-interest loans… you might not be saving any money as opposed to different and traditional loans like a variable rate car loan.
Why? Because dealerships often charge a higher price for the car, add on additional fees, require a large lump sum payment, lower fair trade-in values of your current car and insist on things like balloon payments to earn more money on their sale.
Are interest-free car loans any different from standard car loans?
Yes, they are 100% different from standard car loans. You’re paying more for the car, in a shorter amount of time, with tons of additional or hidden fees attached. A traditional loan is one you know the terms of, can pay off the amount over more extended periods (usually presented as an optional length), and know exactly what you’re getting yourself into.
Is 0% or 1% car finance cheaper than a regular car loan?
In the long term, no, it’s not. While this can differ depending on various factors, it’s not cheaper overall. Instead, you’re getting an overpriced car that has absorbed the interest; you’ll be paying more for services in some cases, and dealing with a shorter loan period.
What to look out for when dealing with 0% car finance deals
Impressive offers that may be too good to be true
You know the saying, if it’s too good to be true, it probably is. Well, that still applies to a zero-percent car loan. Dealerships need people in the store, and the deal was designed to do just that, grab the attention of potential customers. So, be sure to go beyond the bright colors and ‘for a limited time only’ signs all over these ‘amazing deals.’
Strict lending criteria that will hurt you down the road
While traditional lenders offer loans that can reach almost ten years, these loans are more on the shorter side of things. You’re not dealing with traditional lenders. They want the money paid back ASAP. As a result, the loan term is far shorter, resulting in higher monthly repayments than you’d get if you went traditional.
Higher servicing fees and other hidden costs
Understand that a zero-interest car loan usually only applies to new cars and shuts out second-hand or old cars from the program. This is because they’re offered through dealerships as part of a ‘sticker shock’ campaign to get you in the driver's seat. When you’re buying a new car through this method, you’ll likely have to get the car serviced by the dealer to avoid risking the warranty. These services can end up being more expensive than they’d be otherwise.
Up-selling and any other unsavory sales tactic
This happens regardless of you getting a 0% interest car loan. It’s just more aggressive in this type of scenario. You’ll get a barrage of offers for additional items like extended warranties, guaranteed prices for your next trade-in, etc. So be careful, and don’t let this be your purchase reasoning.
The car dealer has inflated the purchase price
The car you’re considering buying at a dealership that’s offering interest-free loans will often have an inflated purchase price that has been inflated. This is easy to check - look at the same car from a different dealership not offering these types of loans or invest a little time searching online, and you’re likely to see that vehicle at a lower price elsewhere.
No room to negotiate the price of the car
Even though interest-free finance sounds great, another caveat you need to understand when it comes to interest-free finance is that these agreements often lack the flexibility of a more standard finance arrangement. When you go into a dealership, you’re often able to negotiate a lower price, particularly if you’re looking to buy an old car. With 0% loans, car dealers are unlikely to give you that opportunity because the dealership has already factored interest into the sticker price.
Unreasonably low trade-in value for your car
One of the most unfortunate aspects of these types of ‘loans’ is that car dealers often undervalue the vehicle you’re trading in to get the next car. This usually results in you selling your current vehicle below its average price to secure zero-interest car finance.
The periods of your interest-free car loan don’t last
Some of these zero-interest schemes are also timed to only last for a certain period. It could be for a few months, a year, or even one to ten years, but it’s not always the entire time of owning the car. Once you reach the end of this term, your loan reverts, and you will be paying substantially higher interest on any monthly repayment than the agreed-upon zero interest rate. You will also have to keep up with any ongoing fees. When you go the route of traditional financing options, you’re dealing with a more fixed interest rate over time which is easier to manage.
Poor balloon payment structure
One of the more frustrating aspects of these interest-free car loans is the balloon payments that sneak up on you. Essentially what this means is that to keep the monthly repayments enticing, they slap a balloon payment on the end, which is far more than what you pay for the duration of the loan term. You’re paying interest, and then you’re paying the bulk of it in the final payment or payments, which differs from a traditional loan.
What are the alternatives to zero-interest car loans?
There are many alternatives to zero-interest car loans. Here are a few different loans you should consider:
- Personal loan: A personal loan is almost the same as a traditional car loan; however, they can be more flexible, giving you money upfront without needing to know where it’s going. Personal loans are outstanding when considering a second-hand vehicle, but you can’t get a car loan with stricter criteria.
- Traditional car loan: a traditional car loan can offer more money than personal loans might and have specific interest payments attached. To get a traditional car loan, you need a decent credit history. These interest rates are sometimes more favorable than personal loans.
- Rent to own: this is a less common method, but it’s similar to zero-interest, except you know more about what you’re getting into than you would a zero-interest car loan. These are great options, as you don’t need a significant deposit to get started.
What questions to ask before agreeing to an interest-free loan
What is the lifetime repayment on the vehicle in question?
You want to know what you’re getting into, which is why this is an imperative question. By asking this question, you will get the best understanding of what you’re spending over the loan term, and this gives you the power to compare it with other dealerships and online options. It also means you can compare loan options to see if it would be cheaper to use a traditional loan.
Is the price of the car fair?
Make sure to take the time to investigate this one, as you might be surprised at what you find just with a few more hours of searching between car companies and dealers. Nobody should pay more than they need to. You want to get your new car at the best possible price and want to reduce the total repayments you’ll need to make on your finance offer. There’s nothing wrong with looking for a good deal - especially one that will require regular repayments and a large deposit!
Is there any room to negotiate?
While we’re skeptical about the answer is yes, it doesn’t hurt to ask. You should find out where and what you can negotiate to lower the overall cost of the vehicle but confirm it when asking for the lifetime repayment post-negotiation.
Is the dealer willing to provide a guaranteed trade-in value?
This one is important because you want to know that you’ve got a car that can be traded in for a decent amount when all is said and done. They lock you in with another sale in a few years, and you lock them in by guaranteeing how much you’ll be reaching for your new car.
Avoid zero-interest car loans if you’re a business owner or someone who needs a car. They seem significant, but they are far from it. Instead, investigate car finance options without hidden extra fees and other shady sales tactics. With Driva, we can connect you to the best car financing options Australia has. We’re ready to help you or your business get the best low-interest car loans!