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We have been discussing how an unprepared car buyer can spend hundreds, even thousands of dollars more than necessary by not arranging for a car loan prior to walking into a car dealership. However, are there circumstances when you are better off getting your car loan from the dealer and not your bank, credit union, or online lender?
Zero Percent Financing is a Wonderful Thing
Radio, TV, and online ads vie for your attention. As an ex-Internet Manager for a major car dealer, I can assure you that you should listen carefully to the car ads that entice you with zero percent financing. If everything is above board--and more on what to watch out for later--you can save tons of money on your next car deal.
Calculating the monthly payment on a car loan with zero percent financing is easy. Let’s take the example of a loan of $20,000 that is borrowed over 5-years (60 months). Because there isn’t any interest, you simply divide the total loan amount by the number of months to calculate the monthly payment: $20,000/60 = $333.33. Simple as pie.
How much money will you save each month if you take advantage of a zero percent financing promotion by your car dealer or auto manufacturer? Let’s take a look at the following scenario:
- I have an excellent credit score that qualifies me for a new car loan at my local bank. The loan has an interest rate of 5.99%. If I borrow $20,000 over 5-years (60 months) my monthly payment will be $386.56. This is $53.23 more per month than the zero percent interest loan payment of $333.33.
How much money will you save over the term of the loan if you get zero percent?
- Simply multiply the increased monthly cost of $53.23 by the term of the loan (60 months) to get the money you save with zero percent financing. In other words, $53.23 x 60 = $3,193.80.
You save $3,193.80 over the term of a 60 month, $20,000 car loan with zero percent financing compared to a standard interest rate of 5.99%. Zero percent financing is a wonderful thing.
Tomorrow we look at what to watch out for when comparing zero percent financing offers.