When we choose to finance a car, we are telling ourselves a number of things. First, we are saying to ourselves that we want something expensive, but may not have the ability to buy it cash. Second, we are say that paying for it over time while throwing money in interest at the bank is also worth it, just to own this item. Last, we are telling ourselves that we don’t mind taking several thousand dollars worth depreciate, should i say burning several thousand dollars the minute we sign the deal.
This is literally what happens every time you buy, or lease a vehicle. But when is it OK finance a vehicle? Glad you asked.. When you can land a 0% APR deal, and the term is long enough for you to pay off the vehicle within the introductory period.
How Much Car Can you Afford?
Ah yes! The age old question, that literally no one asks themselves before stepping into the finance office. Some of us believe that the finance manager or underwriter is really going to look out for our best interest when buying a car. Oh how wrong we are! They are not fiduciaries.
Answer: Take your gross annual income then divide that by 2. This number is the absolute maximum price the car should be after you sign that loan agreement.
Example: $70,000 Gross Annual income / 2 = $35,000 car
Note: Better-Spending recommends taking your NET annual income divide 2, to arrive at a much more comfortable, safe vehicle price
Once you find the maximum you can afford, divide that by 48 mo or even better 36 mo. this is your monthly payment without a down payment(not recommended). If you can’t afford that monthly payment, you truly cannot afford the car.
0% Apr deals
Obviously you have to qualify for such a deal. This usually meant credit scores above 720 and in some cases above 740. If this applies to you, great, you a re in the green so to speak. Now to find the right deal for you.
When to look?
O% APR deals typically pop up when manufactures and dealers have inventory they would like to offload fast to meet earnings goals for that quarter. this is usually at the beginning of the year. Why? In the fall, new model years are released for the coming year. So in fall of 2020, dealers will start to have 2021 model cars.
How is this even possible?
Since you’re not giving the bank any incentive to lend you money, you might be wondering just how it’s possible to get a zero percent interest rate. The answer is that it usually isn’t the bank doing the lending but rather the automaker itself.
The other thing is that the cost of financing is built into the price of the car. If you’re getting a 0% financing car deal, you might have a hard time getting any other incentives on top of that. Which means the automaker is still pocketing a nice profit on the sale of the car itself despite not making any profit on the financing. If you have the cash to buy a car outright, you might be better off taking advantage of bonus cash incentives rather than zero percent financing.
When is 0% a bad deal?
Zero percent financing is a bad deal when you can’t afford the loan. If you’re thinking about buying a new car just because a zero percent financing deal seems too good to pass up, you may want to pause and reconsider. Ask your self this:
- Were you even looking for a new car or did you come across a great financing deal and get car fever?
- Even if you’re not paying any interest on the loan, can you make the monthly payments work in your budget?
- Are you comfortable with the risk involved with financing a car rather than owning it outright?
- If you are trading in a car that’s payed off for a new car and new loan, definitely a bad idea.
0% financing is great for qualified buyers already in the market for a new car. Low rate deals shouldn’t be the sole determining factor in your new car purchase. If you’ve done all the homework for your new car purchase and you find a zero percent deal on a loan that works with your budget, it’s a great way to save money on car loan interest.