The 0% Financing Scam and How to Avoid It
Consumers obviously love these deals because it results in a much lower car payment.
You normally have to choose between a cash-back rebate and the finance incentive. It's usually better to choose the cash-back rebate, but that's besides the point.
The goal of this article is to alert you to a financing scam that pretends to be 0% financing when it's really not.
0% financing is only offered through the manufacturer's finance division (such as Toyota Financial or Ford Credit).
Banks and other lenders cannot offer 0% financing because they would lose money. A manufacturer can do so because they can absorb the costs and still make a profit on the sale of the vehicle.
There are unscrupulous dealers who will advertise 0% financing on vehicles that don't actually have the incentive available.
How do they do it? Simple - they just raise the price of the vehicle to offset the cost of "buying down" the interest rate.
Let's say you qualify for a loan at 5% interest. In order to get the interest rate down to 0%, the dealer will need to prepay all of the interest cost directly to the lender. This may total anywhere from $2,000 to $4,000 on a typical loan.
Guess what? The dealer raises the price of the vehicle by that same amount and tells you "This is the price that qualifies you for 0% financing".
Many car buyers are simply happy with the "low" rate and agree to it.
This scam works best on vehicles that are heavily discounted, so when they add the cost of interest to the price of the car, you still end up paying close to or below MSRP - so it looks like you're not getting ripped off.
So how do you avoid this scam? It's easy - the interest rate on a 0% financing deal should never be contingent on the price of the vehicle. It simply does not matter what you pay for the car. If a dealer insists you only qualify if you pay a certain price, you're getting scammed.
Your best bet is to turn around and run out of that dealership as fast as you can.
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and Ryde Shopper are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
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About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.