Less Than Zero

Unless you've been living in a cabin at Walden Pond, you have certainly heard of zero-percent financing, the General Motors-originated masterstroke that kept car sales humming after the September 11 terrorist attacks. At first glance, the marketing tactic seems very straightforward. Instead of paying interest on your new-car loan, you simply pay off the principal in a prescribed series of monthly payments. What could be simpler? But looking behind the hype, things do get a bit murkier. In fact, some self-proclaimed consumer advocates call zero-percent a bait-and-switch scam. Tough words. So what's the reality? Well, we think it lies somewhere in between.

Let's look at a few potential pitfalls of zero-percent financing. The biggest pitfall, of course, is that you might not qualify for the zero-percent rate in the first place. Interest-free deals are reserved for customers with excellent credit, which means that often the very lowest credit score you need to qualify is 660. Some companies might require a minimum credit score of 700 or even higher to qualify, and that eliminates the bulk of American buyers right there. Most major automakers are affiliated with their own "captive" finance companies with their own credit qualifications, so it is worth checking on their requirements and your credit score before you enter a dealership.

Of course, the car companies are betting you won't do that. They trumpet the zero-percent deals in their advertising hoping they will lure you into the showroom to get a whiff of new-car fever. They figure that even if you don't qualify for the zero-percent loan -- and only about one in 10 buyers do opt for zero-percent financing -- they can entice you with rebates, other financing deals, and the allure of new-car smell. Because of this, some self-titled consumer watchdogs label zero-percent a bait-and-switch tactic, but in defense of the car companies, they do actually write zero-percent deals every day and their criteria for qualification are standardized and available.

Beyond simply qualifying for zero-percent, you must determine if it is offered in conjunction with a loan term that will be to your liking. While a manufacturer or two has tried to prop up its sagging fortunes by offering zero-percent loans for terms as long as five years, most zero-percent deals are for much shorter terms, typically two or three years. What this means is, that while you don't pay interest, your monthly payments will be higher than for a longer-term loan even with some interest. Here's a typical example: Let's say you plan to borrow $20,000 to help pay for your new car. With a three-year term at zero percent interest, you would have to pay about $555 a month in car payments, while a five-year loan at 3.9 percent will carry monthly payments of $367.43. Sure, over the entire term of the loan you will pay an additional $2,045 for the vehicle taking the longer-term loan, but you might well find the tradeoff for a lower monthly outlay to be worthwhile. So the length of the zero-percent loan can be another hangup.

But the biggest problem with zero-percent financing from the car-buyers' standpoint is that it brings on laziness. Instead of comparison shopping, instead of comparing rebate-interest combinations, instead of doing the thorough job that a car-buyer really needs to do to get the best deal, many consumers figure if they are getting zero-percent financing, they are automatically getting a good deal. Well, my friends, in the car-purchase game nothing is automatic.

First, no matter what financing offer you are planning to use, negotiate the purchase price of the car. Do your homework by learning the invoice price for the vehicle and discovering any factory-to-dealer cash incentives the vehicle might carry. With this info in your databank, shop at least three same-brand dealers aggressively, telling them truthfully that you will buy from the store that gives you the best price and best service. With a firm purchase price in hand, weigh the benefits of a zero-percent financing deal versus a non-manufacturer financing deal accompanied by a factory rebate ("cash back.") You might find that taking the factory cash and financing through an independent financial institution like a credit union might well yield a better result than taking the zero-percent deal from the factory.

Remember, each individual's situation is different, so it is impossible to outline a one-size-fits-all solution to the car-buying question, but know this: if you don't extend some effort, you won't get the best deal, even if you do qualify for zero-percent financing.

Driving Today Managing Editor Jack R. Nerad wrote The Complete Idiot's Guide to Buying or Leasing a Car. He is frequently consulted by the media on car-purchase questions.