The Pitfalls of 0% Financing
The 0% car wars began (again) in the spring, and it looks like some of the deals will continue into the summer.
In April, General Motors (NYSE: GM) announced 0% financing or $3,000 rebates on nearly all of its vehicles. Not to be outdone, the Chrysler arm of DaimlerChrysler (NYSE: DCX) and Ford Motor Co. (NYSE: F) essentially matched the incentives. With auto sales slipping, the Big Three are offering their biggest incentives yet to get people into the showrooms.
Should you take the bait? Probably not.
The standard Foolish advice when it comes to buying a new car is, "Don't do it!"
Why? Because vehicles are depreciating assets. Yup, that's right: All that iron, glass, and plastic loses value over time.
How big a bite is this depreciation? On average, cars (and trucks, too) lose more than 20% of their value in the first year. Some vehicles lose as much as 40%. The second year isn't much better, as they disintegrate another 15% or so in value.
If your current vehicle has any life left in it, put off sending it to the junkyard as long as possible. Even if you have to spend $1,000 a year to keep it running, that's cheaper than the $3,750 in car payments you'd fork over if you financed $15,000 of a car purchase over 48 months, even at 0%.
Of course, cars are merely metal -- at some point, they all take their place in that great drive-in in the sky --which means you'll need to get another set of wheels. Should you jump at 0% financing? Here are some considerations:
- With loan rates historically low, you might be better off taking the rebate and getting the auto loan from someplace other than the dealer. Calculate whether the rebate would be your best bet by visiting our online calculators.
- Due to fast depreciation, a used vehicle can be half the price of a new car. Of course, you risk ending up with a lemon. But if you do your homework and buy from a respectable dealer, you could save thousands of dollars -- even without 0% financing.
- The incentives might be offered only on cars on the lot, thus limiting your choices.
- You'll have a hard time getting 0% financing if your credit isn't pretty darn good.
- Some suspect that dealerships increase the price of a car to cover the 0% financing. This may or may not be true. Your best strategy is to consult an independent source, such as Consumer Reports' New Car Price Service, and find out what the dealer paid for the car.
To learn more -- including our Fool-proof way for getting the best price on a car without ever visiting a dealership -- visit our series on Buying a Car.