Is ze­roper-cent fi­nanc­ing al­ways the best deal?

The Chronicle Herald (Provincial) - - WHEELS - LOR­RAINE SOMMERFIEL­D

When Cana­di­ans buy cars, most pre­fer to fi­nance them, and 66 per cent of us do that fi­nanc­ing at the dealer level; we pre­fer one-stop shop­ping.

Times have changed sig­nif­i­cantly since my father would pur­chase one sta­tion wagon for cash and then im­me­di­ately start sav­ing up for the one that would fol­low ten years later. Not only is there no stigma to hav­ing a car loan, it’s as­sumed you prob­a­bly do.

But how you fi­nance that loan could save — or cost — you money de­pend­ing on the type of loan you se­cure. What should you con­sider be­fore you buy a new (or used) ve­hi­cle?

Talk to your bank De­spite the fact most of us like us­ing a dealer, talk to your bank. De­pend­ing on your fi­nan­cial plan­ning sce­nario, se­cur­ing a bank loan for your car could work for you. While in­ter­est rates are typ­i­cally higher, you can dis­cuss ac­cess to vari­able or fixed rates. You might be tempted to lob that car loan onto a se­cured or un­se­cured line of credit but do the math care­fully.

I find the most ben­e­fi­cial part of speak­ing to your bank is to de­ter­mine from a fis­cally re­spon­si­ble po­si­tion just how much car you can af­ford. A stale bank of­fice is far less tempt­ing than a shiny car show­room, even if you end up fi­nanc­ing through the dealer — you’ll know your price point.

The posters are huge, the fine print is tiny. That ze­roper-cent pro­mo­tional rate might be your best deal — un­less it’s not. That rate will ap­ply to a very spe­cific ve­hi­cle or range of ve­hi­cles. It could be as nar­rowly de­fined as a cer­tain model, trim level and term of the loan. If it’s the car of your dreams, it’s hard to beat zero.

Why can’t you get ze­roper-cent fi­nanc­ing on the con­vert­ible ver­sion of the same car that’s in the ad? Deal­ers and man­u­fac­tur­ers are pay­ing close at­ten­tion to things like an im­pend­ing glut of ve­hi­cles in the mar­ket — our cur­rent cir­cum­stances are wreak­ing havoc with this cal­cu­la­tion. Some­thing like a new re­design will spur a move­ment to get rid of the

“old” model.

Hard bar­gainer?

If you like to bar­gain hard, know that that zero-per-cent fi­nanc­ing rate is al­ready the in­cen­tive you’re get­ting. If you don’t have a down pay­ment and you are look­ing for a longer term, this is prob­a­bly the deal for you.

Some­times the pro­mo­tional rate isn’t your best deal. Deal­ers also use the stan­dard bank rate (many have their own terms for it), which opens up other in­cen­tives, some­times in­volv­ing thou­sands of dol­lars. Banks and deal­er­ships have cal­cu­la­tors on their sites that will help you work the num­bers in many ways, or tell your sales rep to do the work for you.

Typ­i­cally, if you seek a shorter term; have eq­uity in a trade-in; and also have a down pay­ment (maybe that cash in­cen­tive), the stan­dard rate could work out to be cheaper. It can be hard to wrap your head around any­thing be­ing bet­ter than ze­roper-cent in­ter­est but tak­ing the time to sort out the var­i­ous sce­nar­ios is a smart thing to do.

Cash isn’t king. The dealer gets their money, whether from the bank, the man­u­fac­turer’s lend­ing arm or you, the day the sale goes through. You may pay monthly, but they get paid once. In fact, they would pre­fer you fi­nanced so they can up­sell you on a whole as­sort­ment of things (some fine, some… less so) and as those things are piled onto the fi­nal bill, you’re go­ing to be more star­tled to see them as a lump sum than you are as an ex­tra eleven bucks a month.

Be­fore you say that’s de­vi­ous or un­fair, the idea of buy­ing a car a month at a time in­stead of as the huge pur­chase it is is re­spond­ing to how most con­sumers pre­fer to buy a car. From a FICO study last year: “For Cana­di­ans, monthly pay­ment amount was a more im­por­tant fac­tor than APR (an­nual per­cent­age rate) when de­cid­ing on automotive fi­nanc­ing (93 per cent and 90 per cent re­spec­tively).” For Cana­di­ans who fi­nance a car loan, nearly ev­ery one of them cares more about the monthly num­ber than the over­all cost.

If you walk into a dealer and tell them you have $400 a month to bud­get, you can pretty eas­ily be mas­saged into a longer (and longer) term on the loan. Sixty months was once the norm; these days no­body bats an eye at 96-month terms, which is in­sane. You can’t af­ford it. Buy less car. I am aware that cir­cum­stances can have your back to the wall but be very cau­tious. Bet­ter to stick with de­cent fi­nanc­ing on less car than wan­der off to less tra­di­tional lend­ing in­sti­tu­tions that can have rates like 29.9 per cent.

If you re­mem­ber only one thing about the dan­ger in ig­nor­ing the fi­nal tally, let it be this: deal­ers are al­lowed by law to give you a loan for 140 per cent of the value of the ve­hi­cle you are pur­chas­ing. That is to al­low space for you to pur­chase and fi­nance things like ex­tended war­ranties.

In­stead, con­sider this sce­nario: you want to trade in your present car, but you owe more on it than it’s worth. No prob­lem, you’re told. They’ll just roll that neg­a­tive bal­ance into the new loan! Af­ter all, we have all that room to work with! Congratula­tions. You’re now driv­ing a de­pre­ci­at­ing as­set with a loan against it that is more than it is worth. Don’t take your eye off the big pic­ture — ever.

A fi­nal note: be re­ally care­ful about co-sign­ing a loan for some­one else. You’re on the hook for the du­ra­tion of the loan, un­less it can be re­fi­nanced with a new loan. In un­cer­tain eco­nomic times, if the per­son you co-signed for is de­fault­ing, it’s likely they can’t re­fi­nance.

And I say that know­ing my Dad co-signed for my first car.

If you like to bar­gain hard, know that that zero-per-cent fi­nanc­ing rate is al­ready the in­cen­tive you’re get­ting. If you don’t have a down pay­ment and you are look­ing for a longer term, this is prob­a­bly the deal for you.

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