Reminder: 0% Financing is NOT Free Money

"Wobbles the Mind" (wobblesthemind) 10/25/2016 at 12:06 • Filed to: Car Buying

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Walking into a car dealership planning to spend $25,000 on a car but finding out the $30,000 “better” vehicle has zero percent financing and the payments will end up lower is still spending an extra $5,000. That is likely more than the interest payments you would have paid on the $25,000. In most cases you’re paying the full interest upfront when you see zero percent financing offers.

It’s like when a $2.79 item goes on sale at 10 for $10. If you were planning to spend $3 then buy three, don’t freaking spend 3 times as much as you planned because of “value.” The best salespeople in the world will leave you bragging to everyone about handing months/years of your income into their hands.

E90M3 > Wobbles the Mind 10/25/2016 at 12:11

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Uh, I’m confused. If they’re the same duration, i.e. both 60 months, and the 30k vehicle is cheaper than the 25k vehicle per month then the total loan on the 30k vehicle would be cheaper than the 25k vehicle.

SidewaysOnDirt still misses Bowie > Wobbles the Mind 10/25/2016 at 12:13

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finding out the $30,000 “better” vehicle has zero percent financing and the payments will end up lower is still spending an extra $5,000.

It’s not. It’s spending a little less for the “better” car. If the terms of the loan is such that the interest rate accounts for more than $5k, you’re spending that $5k either way.

Textured Soy Protein > E90M3 10/25/2016 at 12:15

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$25k at 3% for 60 months = $449.22/month

$30k at 0% for 60 months = $500/month

SidewaysOnDirt still misses Bowie > Textured Soy Protein 10/25/2016 at 12:17

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That’s not the circumstance described though.

fourvalleys > E90M3 10/25/2016 at 12:17

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I think for the point he or she is trying to make, the loan terms wouldn’t be equal - if they are, duh - pay the same or less (total) for a better car.

In any case, who’s comparing the price of a car based only on the monthly payment? We all know not to do that, right?!

Biggus Dickus (RevsBro) > Wobbles the Mind 10/25/2016 at 12:17

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In the finance world, zero percent is always free money.

Wobbles the Mind > E90M3 10/25/2016 at 12:18

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Thank you for asking, I knew someone would catch that! This is what you do as a salesperson, you show them the rates on the $25,000 vehicle with nothing down (don’t point that out), then you show them the $30,000 vehicle’s payments but say you only need $1,500 down (or whatever the difference is) to get the zero percent financing. It’s an awesome technique and the reason why many great loan terms “require” a down payment.

That’s only if the loan terms are the same obviously.

Aaron M - MasoFiST > E90M3 10/25/2016 at 12:19

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Most likely the duration won’t be the same. The ad above is for a 72 month loan, for instance.

Rico > Wobbles the Mind 10/25/2016 at 12:20

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$2.79 item goes on sale at 10 for $10

But if you were buying more than 1 of the item than getting 10 for $10 is better than buying 3 for $9. What if it saves you from needing to return to buy more? Saving you time and money! Let say it’s Irish Spring soap bars and they are your favorite, getting 10 of those could last you the rest of the year!

SidewaysOnDirt still misses Bowie > Wobbles the Mind 10/25/2016 at 12:20

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But you never mentioned a down payment. This is written in such a way as to present a case where the rate is high enough to make up the difference.

fourvalleys > Textured Soy Protein 10/25/2016 at 12:20

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finding out the $30,000 “better” vehicle has zero percent financing and the payments will end up lower is still spending an extra $5,000

If it’s an equal loan term with lower monthly payments, you aren’t spending an extra $5000.

For the sake of this example, the length of the loan cannot be equal, or this argument makes zero sense. Paying less per month for the same number of months wouldn’t mean you pay more overall.

E90M3 > Textured Soy Protein 10/25/2016 at 12:20

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Right, but I read it as the per month loan on the 30k car to be less than the 25k.

As:

25k at 7.5% for 60 months is $500.95/month

30k at 0% for 60 months is $500/month

Meaning that technically the 30k car is cheaper. I’m not sure if that’s what he was saying and that even thought the 30k car is cheaper you’re still spending 5k more, which you’re doing in financing the 25k car.

Snuze: Needs another Swede > Wobbles the Mind 10/25/2016 at 12:21

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I think your initial post was a bit unclear (like some sales tactics), but this makes more sense.

E90M3 > fourvalleys 10/25/2016 at 12:22

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I figured he was insinuating that, I just wanted to make sure that was the case. Personally, I think looking at only per month payment is the worst way to buy car.

Textured Soy Protein > SidewaysOnDirt still misses Bowie 10/25/2016 at 12:23

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Well yeah, I was responding to the comment about two loans of same duration.

In reality, the only ways for a significantly-more-expensive vehicle financed at 0% to have lower payments than a cheaper vehicle with some kind of interest rate on it, are for the 0% loan to be longer term, or the cheaper vehicle to have a much higher interest rate.

As for the original post:

$25k at 3% for 60 months = $449.22/month = $26,953.20 total

$30k at 0% for 72 months = $416.67/month = $30,000.00 total

Smallbear wants a modern Syclone, local Maple Leafs spammer > Wobbles the Mind 10/25/2016 at 12:24

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No, it’s like going to buy one product that costs 2.79 and finding a better product, one you’d prefer to have in the first place, marked down from 3.30 to 2.99—In which case I’d spend the extra and get what I wanted.

And your example is incorrect. There IS value there. You won’t be able to get the 3 by themselves for 3$, so why the hell wouldn’t you spend the extra 7$. Provided it isn’t something perishable of course, you’d be an idiot to leave it behind.

Textured Soy Protein > fourvalleys 10/25/2016 at 12:25

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Yes I know, I wasn’t responding to the example in the original post, I was responding to the question in E90M3's reply.

fourvalleys > E90M3 10/25/2016 at 12:26

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I’m with you 100%. I’ve always grimace a little bit when I hear someone talk about trading their car in and “keeping the same monthly payment.” That’s fine, it’s what you can afford per month - but you’re paying that for potentially many more months. It’s not like a cell phone bill where you have to pay something no matter how long you keep it - eventually you’ll get it paid off.

If you had to make two years less of $350/mo car payments, think of what you could with that extra $8400 (plus interest!)

Wobbles the Mind > SidewaysOnDirt still misses Bowie 10/25/2016 at 12:27

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That is my fault, I figured people would ask and I (or others) could answer specifics in the comments rather than just me predicting random figures. I’ll compile everything once everyone weighs in.

Textured Soy Protein > E90M3 10/25/2016 at 12:29

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The $30k car would only be cheaper over the course of the loan if there were a high interest rate on the $25k car. But in practice this wouldn’t happen because you generally need good credit to qualify for 0% financing, and therefore would qualify for a low enough rate on the $25k car, that your total spend over the term of the loan is still lower on the $25k car. Unless someone with good enough credit to qualify for 0% got offered some stupid high rate on the $25k car by the dealer and took it because they didn’t know any better.

E90M3 > fourvalleys 10/25/2016 at 12:29

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I think a lot of people think short term and don’t look at the whole picture.

Wobbles the Mind > Smallbear wants a modern Syclone, local Maple Leafs spammer 10/25/2016 at 12:35

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If you planning to spend a specific amount on a certain quantity it does not help you to increase your spending and your quantity because of a preceived value. You got the value spending the amount you planned and getting more with it, not by spending more to get more.

E90M3 > Textured Soy Protein 10/25/2016 at 12:35

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His original prose was that the payment on the 25k was more than the 30k, no other stipulations with regards to downpayment or anything of the sort. Therefore assuming that everything in regards to duration and downpayment are the same, you’re paying more for the 25k car. In theory, it’s possible, but extremely unlikely in practice.

Wobbles the Mind > Rico 10/25/2016 at 12:44

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You have a budget of $6, need only two of that item, and know it costs $2.79 each. You walk in and find out that item is on sale 10 for $10, which is $1 each (you don’t have to buy ten because you never do with those deals). In that case, the value comes from either spending the same $6 limit and getting 6 of those items, or buying the quantity of two and only spending $2. What you do NOT do is spend $10 on 10 of those items because you either have spent $4 over your budget or are now storing 8 more of an item you only needed 2 of. All of that is assisting the place with their inventory and profit because you think you’re taking advantage of them.

themanwithsauce - has as many vehicles as job titles > Wobbles the Mind 10/25/2016 at 12:46

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But what happens when both cars are 25k to buy but one has a 2.9 APR and the other is 0? Then it is basically a free loan for the car you wanted to buy anyways. I didnt pick my car because it had 0%, I picked it because I liked and could afford it and I bought when it was 0 percent.

Rico > Wobbles the Mind 10/25/2016 at 12:47

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because you think you’re taking advantage of them.

Whoever has that mindset is wrong anyway. That’s more an old people’s line of thinking “These suckers are letting these things go for a $1? each? I’ll take them for all they’ve got before they realize it”. The way I look at it is they are trying to sell out old stock or create space for new inventory, at the end of the day whatever they are selling for $2.79 they likely got for $.79 as long as you keep that in mind your golden.

Also I understand the budget thing I’m just playing devils advocate.

DipodomysDeserti > Wobbles the Mind 10/25/2016 at 12:51

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I got 0% on my Abarth and it was marked down to $16k from $22k.

Smallbear wants a modern Syclone, local Maple Leafs spammer > Wobbles the Mind 10/25/2016 at 12:53

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No, it means you exceeded your planned value. Win. There’s nothing perceived about it. It’s real and tangible.

While I overall agree with your message not to fall into a mistake just because of something that looks like a huge deal, your example is just wrong. There are only 2 situations where I wouldn’t take advantage of that offer. #1, Perishable goods. I’m not going to buy 10 times what I need in the baked goods aisle just because it only costs 3 times as much. #2, Something that you know for certain is to be a one-time (or at least long-term) purchase. Computer. Floor mat. Barbecue. But if someone offers me 64% off of a bottle of shampoo on the condition that I buy 10 times my normal increment, well... If you say no to that I can’t trust your financial logic. Save 18$ overall, on something I will definitely use, just by putting a little more up front? Not having to go chasing said product for 10 times as long as I usually would? Not my loss.

But back to the main point here... a more accurate headline would be “0% financing IS free money, but nowhere near how much you think it is and there’s a good chance it’s not worthwhile”.

Bottom line is... look at the bottom line. Car A+interest=B, CarY at 0%=Z. The difference between B and Z will be less than the difference in sticker prices, but do the extra features you get, in your mind, make it worthwhile?

Textured Soy Protein > E90M3 10/25/2016 at 14:27

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Down payment doesn’t have anything to do with it. I’m talking about total spending over the term of the loan.

The original post is saying that a $30k car with lower payments than a $25k car still ends up costing more when you look at total spending over the course of the loan. This would be true as long as the reason the payments on the $30k car are lower because the 0% loan is also longer term than the non-0% loan on the $25k car. Which really, this is the most likely reason the payments would be lower on the $30k car.

If we were talking about two loans of the same term where one has lower payments than the other, then obviously the one with the lower payments will be less total cost over the term of the loan.

But for a $30k car to have lower payments over the same term as a $25k car, you’d need a significantly higher interest rate on the $25k car. This scenario is unlikely, because usually car manufacturers only offer 0% financing to people with a credit score above 730. Even without special financing deals, someone with that credit score would easily be able to finance a new vehicle at probably 3-4% tops.

Eric @ opposite-lock.com > Wobbles the Mind 10/25/2016 at 15:35

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You’re assuming the $25000 car and the $30000 car are fungible. They probably are not. It’s likely that the same deal applies to both, in which case you’d spend $25000 anyhow, so spreading over 72 months gets you 6 years of interest on that cash (which is practically nothing right now, but better than a poke in the eye with a sharp stick).

If you have to finance for 6 years either way and that $25k car comes with an interest rate above 3.3333%, you’ll pay more for the $25k car than the $30k car.

If you had the $25k in the bank, paying cash for it looks even worse due to the loss of interest over the life of the loan.

Alex Zapata > Wobbles the Mind 10/25/2016 at 22:53

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It’s probably bad if you have a tight budget, but there is value, since you are getting more of the asset and less paying for the value of money.

One thing I can 100% tell you is a worse investment than a vehicle is cash, cash is stagnant while an asset can generate all kinds of quality of life benefits as well as some revenue if you use it for business in some capacity.

Also, if your downpayment and your term stays the same it makes no sense you would be paying more for the 30k truck than the 25k truck if your payments for the 30k truck are lower.

Think of it like this, you’re spending less on interest and more on truck.

PS9 > Wobbles the Mind 11/26/2016 at 11:22

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The financing company I deal with also doesn’t give me free money, but PS9 Financing corp gives me terms I can’t find anywhere else;

One-time payment

0 Down

$0/month

$0 paid in interest

Full vehicle ownership post purchase

Repossesions (and the life-destabilizing effects of such) are impossible