Zero percent Finance – it sounds fantastic and very seductive but the truth is, well there’s no such thing.
Admittedly when you examine the paperwork you will see that the agreement shows that there is no interest on the loan but in reality you do end up paying that interest in different ways. It stands to reason really, can any company, no matter how large really afford to loan money for free? The answer is, of course, no.
You may think that as many motor manufacturers have their own finance companies that they are able to arrange these zero % deals between themselves. In reality they are completely separate companies and as such are in the business of making profits. That said, how long do you think they would be in business if they lent money for free? Of course, not very long! They are not registered charities and are not set up with the sole aim of helping the dealerships shift units.
So, in that case, where does their profit come from? Who has to stump up for this “hidden” interest? The truth of the matter is that it comes straight from the dealer (well, at least initially…I’m sure you can tell where this is going!)
The dealership in this instance will pay the finance company in a separate transaction. This can be funded by them taking a reduced commission or they may even make an actual payment. Whatever the means it is the dealer that ends up covering the cost of the interest on the loan. How do you think they are able to do this? Correct! You pay for it!
The true cost of providing the “zero % “ finance will have been carefully factored into the other variables within the dealerships control so although at first glance it looks like a great offer you will have to pay for it one way or another. The dealer will have either increased the price of the car that the zero percent deal is attached to, engineered it so that you will be getting less than the genuine trade price for your part-exchange or will provide absolutely no discount on the new car (try negotiating the price on a zero % finance car and see how you get on!). In truth the dealer will probably combine all three of these strategies in order to cover the cost.
The dealer will have a multitude of tricks up their sleeves in order to disguise what is really happening and leave you thinking that the deal you get from them will be better than anywhere else.
Often you will see adverts guaranteeing at least “x amount” for your old car but don’t be fooled, you will get the trade price for your car and nothing more. Or you may see “No deposit and receive £500 cash back!” But as already stated you will end up paying for the cash back
Anything that is offered “free” will have certainly already been taken into account and factored into any offer.
The bottom line is in order to get the zero % finance deal you actually end up having to borrow more money than you would if financed the car at a normal rate.
Take two identical cars, in different dealerships. One of these cars is available at “zero percent finance” and the other car at a standard interest rate. Assuming you negotiated equally as hard at both dealerships what you would end up paying is the same amount per month whichever car or finance option you chose.
Basically a “zero percent finance” deal is a marketing tool used by the dealerships and manufacturers to give the impression that you, the customer, is going to get a fantastic deal. The important thing to remember is not to let this offer sway you in favour of one car or dealer over another. If the car you want is not being offered at zero percent finance don’t compromise just because a similar car is on offer at zero percent, in reality there’s no difference.
Remember you can’t borrow money for free, it just can’t happen.