You know those television commercials showing a brand-new car in someone’s driveway with a big red bow wrapped around it as a gift for the holidays? As a kid, we thought the idea of getting a car was incredible, and enormously generous, given that our idea of an awesome gift was a $15 Dino-Riders toy. Of course, such a gift is incredibly generous, but now we know that such vehicles likely are bought via seasonal and end-of-year sales that offer things such as 0 percent interest rates, 72-month terms, and up to $2500 cash back. And if you’re shopping for a new vehicle for yourself or a very lucky recipient, it’s important to know that not all these offers are created equal.
Zero Percent?
Many automakers are offering financing at or near 0 percent on new-vehicle purchases. But you should know that there are true 0 percent financing deals and there are fake ones, and the latter are far more common than the former, said William Pinilis, an attorney who specializes in consumer law. “Any time you see 0 percent or a cash-back option, it’s not really 0 percent,” Pinilis said. “Whatever you’re giving up, that’s the cost of the credit, that’s the finance charge.”
The finance charge can simply be thought of as the cost of borrowing the money to buy your new ride. So, if you have a 0 or near 0 percent finance but did not take $2500 cash back (as an example), you’re giving up $2500 as part of the finance charge. If you take the cash back, but then have a 4.0 percent interest rate, that interest you pay over the course of the loan is the finance charge.
And if you think that a 4.0 percent interest rate is too steep, consider that, for people with average credit scores, the average rate is about 4.25 percent for 60-month loans on new cars, and the rate climbs to about 5.0 percent for used ones. This raises another point to keep in mind when automakers are offering a zero or near zero percent APR: Most of the time, only buyers with very good credit will qualify for such deals, said Robert Murphy, an economics professor at Boston College. “If you go in and have poor credit, you’re not going to get that deal,” Murphy said.
Seventy-Two Months?
What about longer-term loans? Many automakers are advertising 72-month terms along with those low interest rates. Pinilis said that a longer-loan term basically just means you have use of the borrowed money for a longer period of time. If you can secure a loan with, say, 0.9 percent financing only on the condition that you agree to a 72-month term, that actually would be a pretty good deal, he said. Why not use the money for as long as possible at a low interest rate? “Remember, you’re paying for the use of money,” he said of the interest rate. “That’s what this is.” In the end, a big factor should be whether or not you can or want to pay for the use of that money.
Should I Watch the Fed?
And how about the timing of buying a car? The holiday season is considered a decent time of year to do so, as long as you’re not going after a brand-new model that has just arrived on dealer lots, because many dealerships and automakers are trying to rid themselves of inventory and pad their annual sales figures. Spring is typically considered one of the worst times to get a good deal on a new vehicle. Taking a longer view, both Pinilis and Murphy agreed that the Federal Reserve’s decision earlier this month to raise interest rates does not necessarily mean you should rush out and buy a new vehicle.
However, you may want to pull the trigger if you have the means and were weighing your options for purchasing now or at some indeterminate time in the future. No one can predict the future, but considering the current trajectory of the Federal Reserve and the U.S. economy as a whole, interest rates are likely to continue to climb. “If someone’s thinking of buying a car now versus waiting a year versus waiting two years, and if they have money now, I would say go forward with the purchase,” Murphy said.
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