Advertising campaigns promising ‘zero per cent finance’ are currently everywhere in the car market. When interest rates are low, like they are at the moment, zero % finance offers are commonly used as a device to pull people into car dealerships.
Like all marketing propositions which promise all manner of benefits – from looking younger to feeling better – the reality is usually somewhat less than what’s implied up front. Zero % finance promises something that seems too good to be true; an unbeatable deal.
This is, of course, why it works. The unbeatable offer, for a limited time only, is ideal for getting potential customers into dealerships. At that point, in a very real sense, the offer has done its job. It’s then up to the salesperson to close the deal. Dealers know that more traffic into the dealership equals more sales – it’s a numbers game.
The benefit to buyers, however, is less clear. In fact, the offer itself fails to stand up to basic scrutiny. If the Reserve Bank of Australia has the cash rate at 2.5 %, then doesn’t a zero % finance offer mean the financier is taking at least a 2.5 % loss? And if it doesn’t, doesn’t that mean the money has to be coming from somewhere else?
Most zero % finance offers are really a financial mechanism called ‘sub-vented finance’. Under these arrangements, the finance company is still paid interest, which comes from the gross profit from selling the car (instead of out of the buyer’s bank account once a month for the term of the loan). Either way, the customer is still paying. And, in some cases, they are paying handsomely.
What this means is that the profit must cover the finance company’s interest and the dealership’s overheads. This means the potential to negotiate a discount on the vehicle itself is greatly diminished, or in other words the price is non-negotiable. The profit margin is vital because it pays not only the dealer’s costs, but also the finance company’s sub-vented interest, up front.
Zero % finance is really the carrot and the rest of the deal is the stick. Car dealers want you to think you’re getting a great deal and you want you to think you’re getting a great deal. Superficially a zero % finance offer seems to deliver. There is usually a ‘limited time only’ aspect to the deal. For example, it might be available only until the end of the week or month, or to the first 100 buyers. This is simply a technique employed to place buyers under time pressure.
The dealer wants you to be afraid of missing out on this offer, which already sounds too good to be true. Car salespeople want to get you signed up and locked away before you walk out that door – because if you leave you might go to another dealership and get signed up there, or conduct some independent research with a clearer head.
Neither of these alternatives will help the dealership make a sale.
Independent research and clear financial assessment is vital to ensure you actually get the best deal. It is important to compare exactly what you will end up paying. If you have $10,000 in cash and you want to buy a car advertised for $33,000 drive away, you will need to borrow $23,000. If you sign up at the dealership to borrow that $23,000 over three years with zero % finance you need to calculate what you end up paying. Because it might be cheaper – overall – to negotiate a $3000 discount on the car and arrange independent finance at 7.0 % interest on the $20,000 you’d need to borrow.
Independent finance, at a realistic interest rate, together with some reasonable negotiation about the price of the vehicle, can result in a much better overall deal for you. Independent finance is generally more flexible than zero per cent in-house finance as well.
When buying a new car, it’s vital to get the best possible deal and you can only do that by being informed. Don’t go to a dealership without understanding the true value of the car you intend to buy and a fair price for your trade-in. Discuss your finance options with an independent professional. Don’t sign up on the spot because of the implied or expressed pressure of time. Remember that any time something seems too good to be true, in relation to the transaction, it most probably is. Further investigation, at the very least, is warranted.