Should I Take The Zero-Percent Financing Offered By The Dealer?

Q: I’m in the market for a new set of wheels, and I’ve seen some dealers advertising automobile showroom
zero-percent financing. Should I take this offer?

A: An auto loan without any interest sounds like a dream; however, there are many considerations before deciding to take out a zero-percent financing loan. Let’s take a closer look at zero-percent financing so you can make an informed, responsible decision about your auto loan.

What is zero-percent financing?

An auto loan offer of zero-percent financing means the dealer financer is offering to lend the buyer money without charging any interest over the life of the loan.

With traditional loans, the lender is willing to extend money to the buyer because the lender will reap the benefits of the interest payments over the life of the loan. A zero-percent car loan, though, offers no reward for the lender. In fact, the loan is actually being offered by the auto manufacturer. The automaker stands to benefit from the loan as much as it would from an upfront cash payment for one of its cars. The only difference is that the money is earned over a longer time span. Automakers may offer zero-percent financing on slower-selling models or to help clear out stale inventory to make room for newer models.

Can anyone qualify for zero-percent financing? 

Zero-percent financing may be heavily advertised, but it can be difficult to qualify for one of these loans. They are typically only offered to buyers who have excellent credit, including a credit score above 700 and a long credit history. These buyers are more likely to make every payment on time and they may even pay off the loan early, making it low risk and profitable for the automaker.

It’s also important to note that not everyone can afford to take out a zero-percent financing loan. Since the lenders are only profiting from the actual sale on these loans, they will rarely agree to bargain down the price, nor do they offer any other incentives, such as cash-back rebates.

When is zero-percent financing a bad idea

Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. As mentioned, lenders generally will not bring down the price on a car with a zero-percent financing offer. Buyers may be blinded by the temptation of not paying any interest and therefore consider a vehicle that has a higher monthly price tag than they originally planned.

Another point to consider before committing to a zero-down financing loan is the term of the loan. Some of these loans feature longer terms than traditional auto loans, as much as six years. Six years is a long time to be paying for a car. The buyer’s auto needs may change before then and they won’t own the car for a year longer than they would have through a traditional loan. On the flip side, lots of zero-percent financing loans are only four years long, which can significantly increase the monthly payment amount.

Even if the loan terms do meet the buyer’s needs, it still may be worthwhile to skip the zero-percent financing and take out a traditional loan so the buyer will not miss out on cash-back rebates. These are typically not available on auto loans with special financing offers, and can mean missing out on robust incentives.  You should also negotiate your best “cash” price before taking the zero percent offer.  You may be able to save more by negotiating a better price on the car than you would by the lower interest payments.

Let’s take a look at the purchase of a single car and run it through both kinds of loans.

A car is selling for $20,000 with the offer of a zero-percent financing loan that needs to be paid off in four years. Monthly payments on this loan will amount to $416. Suppose that payment is too high for you and you would prefer to extend the term beyond the four years?  It may not be possible with the zero-percent financing.

Alternatively, the buyer can consider a traditional loan for the same car. An auto loan furnished by a credit union at the average national rate according to data extracted by the NCUA would give the loan an annual percentage rate (APR) of 3.45 percent. Over five years, this would amount to a monthly payment of $363Destinations Credit Union currently offers a rate as low as 2.74% APR, making the monthly payments $357 over that same 5 years.

In addition, with a traditional loan, the buyer can take advantage of manufacturer rebates. If this car would have an offer of a $2,500 cash-back rebate, its price would drop to $17,500. Through a Destinations CU loan with an APR of 2.74 percent, the monthly payments would only be $312. The total amount paid on the car would also be less than the amount paid through the no-interest loan, at $18,757.

If the buyer chose to take out a loan through a bank, with auto loan APRs averaging at 5.10 percent, the monthly payments (without the manufacturer’s rebate) would be $378. If the manufacturer offered a rebate, that amount would fall to $331 a month.

Evidently, when there is a shorter loan term involved, it is not always worthwhile to take out a zero-percent financing auto loan.

If the offer does not feature a shorter loan term, the difference between scenarios wouldn’t be as dramatic. A five-year loan on $20,000 with zero interest would cost the buyer $333 each month, only $21 more than the traditional loan through a credit union after the rebate ($1,260 over the life of the loan); however, a five-year loan term may not be an option on a no-interest loan. Also, when you take out a loan through Destinations CU, you’ll enjoy personalized service and zero pressure to make a decision.

It’s best to run your own numbers through a free auto loan calculator to see what your actual monthly payment would be before taking on a loan. It’s the best way to determine if you can afford the payments without overextending your budget.

If you’re ready to get started on your auto loan, stop by Destinations CU today to get started. We’ll have you seated behind your new set of wheels in no time!

Your Turn: Have you chosen to forego a zero-percent financing option? Tell us about it in the comments.

Sources:
https://www.autotrader.com/car-tips/buying-car-whats-catch-0-percent-loans-222702
https://www.bankrate.com/loans/auto-loans/0-apr-car-deals-are-they-worth-it/
https://www.edmunds.com/car-loan/what-you-need-to-know-about-zero-percent-car-loans.html

Should I Take the Zero-Percent Financing Offered by the Dealer?

Mercedes Benz Car Show Room Floor.

Q: I’m in the market for a new set of wheels, and I’ve seen some dealers advertising zero-percent financing. Should I take this offer?

A: An auto loan without any interest sounds like a dream; however, there are many considerations before deciding to take out a zero-percent financing loan. Let’s take a closer look at zero-percent financing so you can make an informed, responsible decision about your auto loan.

What is zero-percent financing?

An auto loan offer of zero-percent financing means the dealer financer is offering to lend the buyer money without charging any interest over the life of the loan.

With traditional loans, the lender is willing to extend money to the buyer because the lender will reap the benefits of the interest payments over the life of the loan. A zero-percent car loan, though, offers no reward for the lender. In fact, the loan is actually being offered by the auto manufacturer. The automaker stands to benefit from the loan as much as it would from an upfront cash payment for one of its cars. The only difference is that the money is earned over a longer time span. Automakers may offer zero-percent financing on slower-selling models or to help clear out stale inventory to make room for newer models.

Can anyone qualify for zero-percent financing? 

Zero-percent financing may be heavily advertised, but it can be difficult to qualify for one of these loans. They are typically only offered to buyers who have excellent credit, including a credit score above 700 and a long credit history. These buyers are more likely to make every payment on time and they may even pay off the loan early, making it low risk and profitable for the automaker.

It’s also important to note that not everyone can afford to take out a zero-percent financing loan. Since the lenders are only profiting from the actual sale on these loans, they will rarely agree to bargain down the price, nor do they offer any other incentives, such as cash-back rebates.

When is zero-percent financing a good idea?

For buyers who qualify, a zero-percent financing loan may be a way to save on steep interest payments throughout the life of an auto loan. A buyer can easily save several thousands of dollars in interest payments over the life of a zero-financing loan.

It is crucial that qualifying buyers crunch the numbers to be sure they can easily afford the monthly payments on a zero-interest loan. If all the numbers add up and the buyer’s credit makes the cut, a zero-interest loan can be a great way to save money on a new set of wheels.

When is zero-percent financing a bad idea

Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. As mentioned, lenders generally will not bring down the price on a car with a zero-percent financing offer. Buyers may be blinded by the temptation of not paying any interest and therefore consider a vehicle that has a higher monthly price tag than they originally planned.

Another point to consider before committing to a zero-down financing loan is the term of the loan. Some of these loans feature longer terms than traditional auto loans, as much as six years. Six years is a long time to be paying for a car. The buyer’s auto needs may change before then and they won’t own the car for a year longer than they would have through a traditional loan. On the flip side, lots of zero-percent financing loans are only four years long, which can significantly increase the monthly payment amount.

Even if the loan terms do meet the buyer’s needs, it still may be worthwhile to skip the zero-percent financing and take out a traditional loan so the buyer will not miss out on cash-back rebates. These are typically not available on auto loans with special financing offers, and can mean missing out on robust incentives.

Let’s take a look at the purchase of a single car and run it through both kinds of loans.

A car is selling for $20,000 with the offer of a zero-percent financing loan that needs to be paid off in four years. Monthly payments on this loan will amount to $416.

Alternatively, the buyer can consider a traditional loan for the same car. An auto loan furnished by a credit union at the average national rate according to data extracted by the NCUA would give the loan an annual percentage rate (APR) of 3.45 percent. Over five years, this would amount to a monthly payment of $363.

In addition, with a traditional loan, the buyer can take advantage of manufacturer rebates. If this car would have an offer of a $2,500 cash-back rebate, its price would drop to $17,500. Through a loan with an APR of 3.45 percent, the monthly payments would only be $318. The total amount paid on the car would also be less than the amount paid through the no-interest loan, at $19,080.

If the buyer chose to take out a loan through a bank, with auto loan APRs averaging at 5.10 percent, the monthly payments (without the manufacturer’s rebate) would be $378. If the manufacturer offered a rebate, that amount would fall to $331 a month.

Evidently, when there is a shorter loan term involved, it is not always worthwhile to take out a zero-percent financing auto loan.

If the offer does not feature a shorter loan term, the difference between scenarios wouldn’t be as dramatic. A five-year loan on $20,000 with zero interest would cost the buyer $333 each month, only $15 more than the traditional loan through a credit union after the rebate; however, a five-year loan term may not be an option on a no-interest loan. Also, when you take out a loan through , you’ll enjoy personalized service and zero pressure to make a decision.

It’s best to run your own numbers through a free auto loan calculator to see what your actual monthly payment would be before taking on a loan. It’s the best way to determine if you can afford the payments without overextending your budget.

If you’re ready to get started on your auto loan, stop by today to get started. We’ll have you seated behind your new set of wheels in no time! Below you will find some links to our page for our Auto Loans.

Auto Loans Vehicle Search

Your Turn: Have you chosen to forego a zero-percent financing option? Tell us about it in the comments.

Why You Should Finance Your Next Car Loan At Your Credit Union

When shopping for a new set of wheels, your first stop should be right here, at cars in dealer showroomDestinations Credit Union. Though many people start their process on the dealer’s lot, you’ll enjoy a lower rate, a simpler loan application and other benefits by choosing to finance your car with your credit union. And, if you prefer to shop online before making your decision, check out our Car Buying Service – you never have to leave our site to research, find all available inventory, compare your vehicles and more!  Best of all, you can avoid the pesky ads and phone calls.

This is why people are increasingly choosing to finance their cars directly through credit unions. In fact, auto loans comprise more than a third of all the active loans across the 5,600 credit unions in the U.S.

Let’s take a look at the differences in the auto loan process at a car dealership versus Destinations Credit Union.

Financing an auto purchase at a car dealership

When you visit a dealer’s lot with the intention of purchasing a car, the dealer will likely ask you how much you’re willing to spend on your vehicle of choice. You may have already worked out your numbers, or, you may just have a vague idea of how much you can realistically afford. Either way, the dealer will probably try persuading you to push your self-imposed limits to the max or even to go over your ceiling price.

But, if you’re financing your car through the dealer, that’s only the beginning. Once you’ve chosen the car you’d like to buy, you’ll need to submit a complicated auto loan application form, which the dealer will send to the finance companies it partners with. This can include lenders and financial institutions. The dealer will then share the lenders’ offers with you and ask you to make your choice.

However, in most cases, the dealer is only the middleman. This means they are going to present your options in a way that most benefits them – and not you. Thanks to this practice, even a fantastic offer from another lender will be presented as higher than it actually is, or may not be presented at all.

For example, say your dealer contacts three lenders: Lender A, Lender B and Lender C. Lender A agrees to offer you a 5% Annual Percentage Rate (APR), Lender B offers a 6% APR, and Lender C offers a 7% APR. But the lender will not automatically present you with Lender A’s offer. Instead, they will first determine which lender would afford them the greatest profit.

The rates presented by the above lenders are known as the “buy rates,” or the lowest possible rate the lenders will grant the borrower.

Lender A might offer the dealer a flat fee for each new loan the dealer nets them at the buy rate, with more profit granted for each new tier of a car price, such as $10,000. Lender B, on the other hand, allows the dealer to increase the buy rate by 3% to a new “contract rate.” The dealer then pockets the difference as his own profit. Lender C allows the dealer to offer a contract rate at 2% higher than the buy rate.

In the above scenario, it isn’t hard to picture the dealer pushing you to accept an offer from Lender B or Lender C at the new contract rate of 9%. If you complain that this rate is too high, the dealer may then suddenly “remember” that Lender B is willing to finance the loan at a 7% APR. In either case, there’s very little chance you’ll end up being presented with the offer that is truly in your best interest. And you’ll never even know you’ve been duped!

Financing an auto purchase at a credit union

Getting an auto loan with your credit union is a completely different experience. Why? Because we exist to serve your best interest.

When you walk into Destinations Credit Union with the intention of taking out an auto loan, you’ll be dealing with people who know who you are and what your financial reality is like. No one will try to push you into a loan you can’t afford.

The process of applying for a Destinations Credit Union Auto Loan is simple, quick, and easy. You can even apply for a loan online. Also, as a member of Destinations Credit Union, you already have a headstart on getting that pre-approval.

One of the biggest advantages you’ll have when financing an auto loan through your credit union, though, is a lower APR. Because you’re working directly with the lender, you’ll only hear the actual rate we offer instead of a marked-up rate the car dealer presents to you.

Also, as member-owned and operated institutions, credit unions famously offer loan rates that are consistently lower than those offered by large lenders and banks. In fact, according to Bankrate, the average APR on a credit union auto loan in the beginning of 2019 was a full point lower than the rates offered by banks.

Another key advantage you’ll enjoy from a credit union-financed auto loan is a more relaxed setting when determining how much you can afford to pay each month toward your new car. There’s no rush and no pressure when you’re sitting at Destinations Credit Union and working out your budget. In contrast, when you’re standing in the dealer’s lot surrounded by cars you wish you could afford, you’re far more likely to make a decision you’ll later come to regret.

If you’re in the market for an auto loan, make your credit union your first stop. You’ll enjoy a lower rate and the friendly, professional service you’ve come to expect at Destinations Credit Union.

Your Turn: Have you financed a car purchase through your credit union? Tell us about it in the comments.

SOURCES:
https://www.magnifymoney.com/blog/auto-loan/why-you-should-avoid-financing-a-car-through-a-dealership/

https://www.nerdwallet.com/blog/loans/auto-loans/auto-financing-before-dealership/
https://www.bankrate.com/loans/auto-loans/6-reasons-to-get-a-credit-union-car-loan/amp/

Cars & Credit: How Your Credit Impacts Car-Buying

Purchasing a car can help boost your credit score if you consistently make on-time impact of credit on car buying speedometer type image showing scredit scorespayments. On the other hand, you need fair or better credit to qualify for a car loan.

How can you get the loan you need, then, if your credit is not ideal?

It helps to understand just how important credit is to obtain a car loan and what steps you can take to increase your ability to do so.

Factors Impacting Your Ability To Buy A Car

If you wish to buy a vehicle using a loan, you need to prove to the lender that you are a good credit risk.

In every situation, the lender needs to weigh just how much risk a borrower is based on how likely they are to repay the debt in full. Borrowers who are a very high risk may not qualify for the loan. On the other hand, borrowers that are a lower risk may qualify for a lower interest rate.

When vehicle lenders consider you for an auto loan, they are thinking about the following:

  • What do you want to buy – is it worth how much you want to pay for it?
  • Do you have previous borrowing experience that shows you are a reliable borrower?
  • Do you have the financial means to repay your debt on a monthly basis along with any other debt you have?

It is up to you, then, to show lenders your goals are achievable. Even if you have never obtained a vehicle loan in the past, working with a credit union or other lender is possible if you can show you are a good risk.

Type of vehicle

First, consider the vehicle itself. How does the vehicle play a role in whether or not a lender will give you a loan?

Car loans are secured loans in most cases. If you stop making payments on the loan, the lender will force the sale or repossession of the car. This offers the lender a bit of a safety net. They can sell the car to recoup at least some of the cost of the loan.

For this reason, car loans tend to be a bit easier to qualify for than an unsecured loan, such as a personal loan.

The lender must learn about the actual value of the car. They use a number of tools to determine this including an appraisal of the vehicle. It does not matter what the dealership wants you to pay for the car. The vehicle must be worth that much from a third-party appraisal service.

If the vehicle is worth the amount you wish to buy it for, the lender may approve the loan for you.

Credit history

The next step is determining if you qualify for a car loan based on your previous borrowing history.

The best way for a lender to know this is to pull a copy of your credit history. This includes all of the accounts you have had in the past. It covers previous car loans, credit cards, any judgments against you, and mortgages. Most lenders use a credit score to determine your qualifications. A score is simply a mathematical representation of your borrowing history.

Poor or no credit history?

Some people have no credit history. Others have a poor record of making payments on time.

If you find that your credit score is limiting your chances of obtaining a loan, there are several things you can do…

  • Make on-time payments on all current debts. Doing this for several months increases your dependability. Avoid being late on payments.
  • If you have no credit history, consider a secured credit card or a low-fee credit card. Most credit unions and credit card companies offer these to those who have employment.
  • Consider paying down some of your debt. The lower your debt to credit limit ratio, the better.
  • Don’t apply for too many credit cards or loans in a short period of time. Aim for no more than one or two every few months to a year.
  • Get a co-signer for your loan. A person who has a good credit score can help you qualify for a loan. And, in the long term, this can boost your credit score as well.

Gradually work on improving your credit score over time. When you do so, you eliminate the lender’s concerns that your past borrowing habits will translate into a new loan.

Employment status

Finally, a lender needs to know you have the income necessary to make payments on the vehicle. Even if your credit is fantastic, if you do not have a way to prove to the lender that you have income, then the lender is unlikely to offer you a loan.

More specifically, the lender is looking at your debt to income ratio. How many expenses do you have compared to how much income you have coming in? The lower this total, the more likely you are to have the cash on hand to make payments.

If you do not have steady employment, you may wish to work on this as a first step. Be sure you can prove to your lender that your employment is reliable, too. Paycheck stubs can assist in showing steady employment.

The Role Credit Plays In Car Buying

Each one of these factors plays a role in your ability to obtain a new car loan.

Other factors can do so as well. The interest rate, whether or not you have a down payment, and even if you are buying a new or used car can impact the lender’s decision. Yet, beyond anything else, it comes down to your ability to make payments on a timely basis.

If you are unsure whether you qualify for a car loan, work with your local credit union. They know you and are more likely to lend to you than traditional banks. These loans may even be more affordable than those obtained from other sources.

Learn more about auto loans at Destinations Credit Union.