Saturday, September 18, 2010

NO DEAL: Zero Percent Auto Financing

Zero percent auto financing is not the deal it seems by Clark Howard

RIP-OFF ALERT: Have you seen offers for zero percent financing for five years at auto dealerships? They're the No. 1 come-on right now because dealerships know similar ploys worked so well earlier this decade.

Why are offers like this that seem to be a good deal actually a rip? Well, first off, about 60 percent of customers are being turned down when they apply for the zero percent offer. The automakers have made the credit requirements very strict -- as they should. They know that the allure of zero percent financing gets people in the door and that's really what they're after.

So be honest with yourself. If your credit is not perfect, don't go into that dealer expecting to qualify for zero percent. You'll be turned down and then -- and here's the part the dealerships love! -- talked into letting the finance department write a loan for you at above-market interest rates.

So you actually end up burning yourself twice: First because you don't get the zero percent and second because you walk out there with a high-interest loan.

Finally, there's the question of how long you should finance a vehicle. Kelley Blue Book now says 62 percent of car shoppers are looking at financing longer than 48 or 60 months. Yet Clark recommends car loans of no longer than 42 months.

Why 42 months? That's the last sweet spot where the car's value over time and the loan balance over time stay on a nearly even pace together.

Limiting your car note to no more than 42 months may mean you can't afford the car you really wanted. It can be a hard dose of reality when you find you're buying too much car. Too often, though, buyers will get rid of a car before the balance has been paid and the losses are rolled over into a new, larger loan. Don't do it!!

Dealers love "payment buyers" who can only afford to pay X dollars per month. By taking that approach to purchasing, you lose sight of the total cost of the loan over its lifetime.

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