6 January 2017
0% Car loan: is it the best choice of funding?
Are you about to get a brand new car, but still unsure about how to finance your purchase? Here, we give you different methods, whilst explaining the pitfalls to avoid!
Financing a new car: what are the options?
Using your savings or getting a loan? Which loan to choose? Borrowing from a bank or a car dealer?
Loan or savings?
Given the low interest rates, a loan can be advantageous for buying a new car. But low interest rates also mean that your money left on your savings account will not yield very much. The choice between taking a loan or using your savings will depend on your financial situation and your needs.
The classic car loan is very popular because of its attractive interest rates. The loan being justified by the purchase of a car, this constitutes a guarantee for the bank. The latter can then offer more competitive rates compared to a personal loan without a defined purpose. Once the bank accepts your application (containing the proof of purchase), you will receive the funds, to be reimbursed by fixed and equal monthly instalments (representing interest and capital) throughout the loan duration. Some banks also allow you to borrow more than 100% of the car price to cover insurance, road taxes, etc.
Car dealers’ loans
Some car dealers also offer car loans. They are well known to offer lower rates than the banks, sometimes as low as 0% rates. But is this really the best solution?
0% Car loan: what is it?
Some car dealers offer very low interest rates to finance your new car purchase, sometimes as low as 0%. This financing method can sound interesting at first, because you will only have to reimburse the capital without any additional interest to pay. But is this really the case? Never forget that borrowing money also costs money, even when you think you are being offered “free” financing. Here, we explore the “hidden” costs that can be associated with a 0% loan.
- First of all, there is no such thing as a free loan. The interest you will not be paying on this loan will be charged to the car dealer. It is therefore a commercial gesture.
- Because the car dealer is taking responsibility for the interest costs, he will limit the duration of the loan, in order to limit this cost. A shorter duration means that your monthly instalments can then become exorbitant.
- The commercial gesture on the loan interest might also mean the car dealer will not give you additional gifts on the car:
- He will give you no or very little discount on the vehicle. Yet the reductions you can expect on a new car can rapidly exceed the interest you would save on a short-term car loan. Is it then really worth overlooking them?
- Also, if you want the car dealer to buy back your old car to finance part of the new one, make sure that its value is not underestimated. This is another trick to compensate the advantage given on the loan. Once more, check that the interest you are saving on the loan does compensate what you lose on the trade-in of your old car.
- Even if you are not paying interest, the 0% car loan involves opening a credit line. It will therefore be entered on the Individual Credit Centre Register, which could affect your chances of getting another loan. Thus, there is no advantage on this point compared to a classic car loan.
- Lastly, to give you a 0% car loan, the car dealer will ask you for a substantial down payment. You must have this amount available and be prepared to do without it to benefit from this type of loan.
A concrete example
Let’s take the example of a 15,000 € new car and compare loans and discounts.
A car loan at 1,75% over 36 months represents a total credit cost of 404.76 €. If you opt for the 0% loan offered by the car dealer, your gain will be 404.76 €. You will probably not receive further discounts on the vehicle.
The discount the car dealer can offer you generally varies between 3% and 19% of the purchase price. On 15,000 € this will represent a minimum of 450 € (3%) and a maximum of 2,850 € (19%). The discounts will in any case save you more than if you opted for the 0% loan.
Contrary to what one might think, a 0% car loan is thus not without expenses. Do not rely on appearances and calculate your potential gains and shortfalls before choosing your financing method.