Agreeing to an interest free car loan probably seems like a no-brainer. Interest is the fee charged for borrowing money from a lender, so logically having a smaller fee is better, right? Not necessarily. Here are some things to consider about interest free car loans.
1) Interest free car car loans are usually on new cars only.
In most cases, you will only be able to get an interest free car loan on new cars. This is because the financing for new cars can come directly from the manufacturer. The manufacturer has more flexibility than other lenders to offer competitive loans, and they are highly motivated to do so. Their goal is to entice people to purchase new cars rather than used cars. In a tough economy zero interest loans become more common.
2) If you agree to zero interest, expect that you will pay a higher price.
Because zero interest car loans also have zero profit potential, the dealer must be able to make a profit elsewhere, and usually this will be in the price of the car. Not only can you expect to pay at or near MSRP, but the dealer will also hard-sell you on many extras that will put more money back into their pocket. Although the loan may be interest free, the profit from selling add-ons such as extended warranties can make the car loan highly profitable.
3) Zero interest might not be permanent.
Sure it's zero interest....for the first twelve to twenty four months. After that, some dealers will increase the interest rate for the remainder of the loan. If you agree to a zero-interest loan, be sure that you are aware of the terms, and whether or not you can expect the interest rate to go up after a time.
Considering the catches of zero interest loans, it might make more sense to go with a more traditional car loan. A better option might be to negotiate a good price on the car with a longer loan term. Then pay off the loan faster, making more than the minimum payment each month. While you will still pay a little bit of interest, you could potentially get a better deal on the overall price of the car. Buying used is another option to consider. If you choose a used car, go for one that is three to five years old. This is old enough that it will have already taken its biggest depreciation hit. Do a little research and see which option would be best for you.