Zero Percent Financing – Good Deal or Gimmick?

by Jim Thompson | Last Updated: January 11, 2021

At first, the idea of zero percent financing seems like a great deal for a buyer while not so much for the seller. Maybe the reason car dealerships have sold a lot of cars this way is that consumers might feel like they are winning for once in an industry where it often seems as the car lot always has the upper hand. So the question is, with zero percent financing, is the deck stacked in favor of the buyer or not? When deciding if zero percent is right for you, there are several factors to bear in mind.

Who Qualifies?

While the enticement of zero percent might be enough to draw a consumer in, truth is only about 5% of consumers actually qualify. Generally speaking, to be eligible for zero percent financing, a consumer must own their home, have a minimum credit score of 750, a very secure job and very little debt. Smacks of a little “bait and switch” doesn’t it

Even if you are in the 5% that qualifies, the term of the note is usually very short meaning higher monthly payments. Then it becomes a matter of your ability to pay off a big ticket purchase in a term that is typically two years or less. Since the buyer has already come into the showroom with the intent to buy, they are often willing to accept a higher interest rate just to get the deal done.

Dealers Play the Numbers

Consumers can also miss the fact that sellers often also protect their profit margins by inflating the prices of items offered with zero percent financing. Often a consumer is so enamored with the idea of the financing that they never bother to negotiate price thinking that the 0% offer is such a great deal when, in fact, nothing could be further from the truth.

Another condition of zero percent financing that bites consumers is fine print that favors the seller. If the buyer misses a regular payment or goes beyond the term of repayment, they become responsible for the interest that has accumulated from the origin of the loan. Further, these interest rates are often many times higher than the industry standard for a similar loan. Add to this the distinct possibility of penalties and fines and now the repayment adds thousands to the original purchase price.

Really a Buyer’s Best Option?

As you can see, zero percent financing certainly favors the seller even while claiming to be a great deal for buyers. The only time zero percent is a win is for the consumer with above average income and an excellent credit rating. However, people in this situation often have the ability to simply pay cash. These same individuals are also savvy enough to notice the inflated front end price and for that reason stay away from zero percent deals.

For the other 97% of Americans, the threat of high payments and stiff penalties if they fail to fulfill the terms of the loan agreement should serve to deter them from entering a zero percent financing situation. When you consider that as many as 65% of consumers fail to meet the repayment requirements demanded by a zero percent contract, it’s easy to see why sellers of automobiles, furniture and other big-ticket items use this gimmick to lure in customers and reap big rewards.