The truth about zero percent Finance

zero percent Finance

Zero percent Finance – it sounds fantastic and very seductive but the truth is, well there’s no such thing.

Admittedly when you examine the paperwork you will see that the agreement shows that there is no interest on the loan but in reality you do end up paying that interest in different ways. It stands to reason really, can any company, no matter how large really afford to loan money for free? The answer is, of course, no.

You may think that as many motor manufacturers have their own finance companies that they are able to arrange these zero % deals between themselves. In reality they are completely separate companies and as such are in the business of making profits. That said, how long do you think they would be in business if they lent money for free? Of course, not very long! They are not registered charities and are not set up with the sole aim of helping the dealerships shift units.

So, in that case, where does their profit come from? Who has to stump up for this “hidden” interest? The truth of the matter is that it comes straight from the dealer (well, at least initially…I’m sure you can tell where this is going!)

The dealership in this instance will pay the finance company in a separate transaction. This can be funded by them taking a reduced commission or they may even make an actual payment. Whatever the means it is the dealer that ends up covering the cost of the interest on the loan. How do you think they are able to do this? Correct! You pay for it!

The true cost of providing the “zero % “ finance will have been carefully factored into the other variables within the dealerships control so although at first glance it looks like a great offer you will have to pay for it one way or another. The dealer will have either increased the price of the car that the zero percent deal is attached to, engineered it so that you will be getting less than the genuine trade price for your part-exchange or will provide absolutely no discount on the new car (try negotiating the price on a zero % finance car and see how you get on!). In truth the dealer will probably combine all three of these strategies in order to cover the cost.

The dealer will have a multitude of tricks up their sleeves in order to disguise what is really happening and leave you thinking that the deal you get from them will be better than anywhere else.

Often you will see adverts guaranteeing at least “x amount” for your old car but don’t be fooled, you will get the trade price for your car and nothing more. Or you may see “No deposit and receive £500 cash back!” But as already stated you will end up paying for the cash back

Anything that is offered “free” will have certainly already been taken into account and factored into any offer.

The bottom line is in order to get the zero % finance deal you actually end up having to borrow more money than you would if financed the car at a normal rate.

Take two identical cars, in different dealerships. One of these cars is available at “zero percent finance” and the other car at a standard interest rate. Assuming you negotiated equally as hard at both dealerships what you would end up paying is the same amount per month whichever car or finance option you chose.

Basically a “zero percent finance” deal is a marketing tool used by the dealerships and manufacturers to give the impression that you, the customer, is going to get a fantastic deal. The important thing to remember is not to let this offer sway you in favour of one car or dealer over another. If the car you want is not being offered at zero percent finance don’t compromise just because a similar car is on offer at zero percent, in reality there’s no difference.

Remember you can’t borrow money for free, it just can’t happen.

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6 Responses to The truth about zero percent Finance

  1. GlenS May 14, 2008 at 4:49 pm #

    I suspect most people already new or suspected as much (no such thing as a free lunch?) but interesting nevertheless

  2. steve sellars March 18, 2009 at 11:13 am #

    at last!
    the penny seems to have dropped that ‘0%’ finance doesn’t exist. of course it doesn’t….theres not a finance company on gods earth that will lend money for nothing anymore than a petrol station will fill your tank up for free!
    in my long motor trade experience, the only people who want ‘0%’ anyway are the people who dont actually need finance and would otherwise have paid cash anyway!

  3. Saddler May 30, 2009 at 4:19 pm #

    Hilarously misinformed article. This may have been the case 20 years ago but now it never happens. Yes someone funds it but it is the manufacturer who does so and not the dealer. The customer either takes up the offer or he does not and in no way is the dealer able to retain the money instead. As a result the dealer cannot offer additional money if the customer does not take up the offer. If the dealer has to contribute a subsidy at all in this day and age it is a minimal token amount. The author of this article shows that it is a very long time since he operated in the motor trade if he ever did at all.

  4. admin May 30, 2009 at 8:26 pm #

    I think you may be missing the point. Whoever funds it, no one lends money for free…so there really is no such thing as “zero percent” in the long run….

  5. T2 May 31, 2009 at 10:34 pm #

    I dont think Saddler is missing the point at all actually. I am also in the motor trade at the sharp end and I also feel that this is a very misleading article. Just for starters you intimate within this article that the customer can get a better deal if they do not take interest free credit against a new car. That is total rubbish. Tell me something ??? If a manufacturer offers say a free servicing offer then can the dealer also cash it in instead of passing the offer to the consumer? No they cannot and the same applies to an interest free credit offer. The manufacturer puts up the money and it is up to the customer to take it or not. I can assure you it is not passed on to the dealer instead to do with what he pleases. I agree the dealer will make no finance commision on a 0% offer unless the customer takes add ons but any dealer who lives only on finance commision is playing a dangerous game with regards to his long term survival. As you should know finance commision can be clawed back at any time what with early settlements etc. Any sensible dealer today treats finance commision only as a bonus and not as a certainty. He will not factor it in to a deal because he cannot be guaranteed to keep it. After all the customer may not even choose to take the dealer finance in the first place so it is impossible to factor it in beforehand. If a dealer has to pay a “subsidy” on an interest free offer nowadays it is a token amount which is in most cases no more than £100 and in many cases much less so in the grand scheme of things it is irrelevant to the over all deal the customer recieves. I myself have been selling cars for nearly 25 years and I must agree with Saddler that to me it seems that the author of this article has been out of the sharp end for a very long time. I can see the points made being relevant in relation to the motor trade of say 15 years ago or more but it bears no relation to how it is done today. Dealers have nothing like the margins they had in the old days so there is no way they would be able to subsidise such offers today as described in this article. I have no issues in sites like this giving postive and constructive advice to consumers because at the end of the day it actually can make the likes of my job much easier. However I must state that this particular article is a very misguided piece of writing and it in fact does consumers no favours at all. It just arms them with imformation that is totally wrong. I think you need to conduct some more up to date research because I also suspect you have been away from the “sharp end” for a long time if this is the standard of article you are currently producing for consumers.


  6. admin June 1, 2009 at 7:40 am #

    T2, thanks very much for your comments which we are happy to publish in full. You are right this article was written by a contributor quite some time ago and has been on the site since day one. It’s safe to say that our site has been through many changes since then and this particular article may not represent life at the “sharp end” as it where. It’s interesting that with the ebb and flow of the internet this article is picking up some renewed debate so long after it was originally published but we are obviously aware that it is on the “front page”. We think that people reading the original article and subsequent comments should be able to make up their own minds about “zero percent”. As we have stated the original motivation was the concept that “no one lends money for free” which we stand by but are willing to accept that, in fairness, this article does not represent how things may be done now. Thanks again for your contribution.

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