Are 0% Car Loans Really Free?

In the era of ultra-low interest rates, many car dealers offer financing for new cars at 0% for several years. This essentially allows you to pay the purchase price and nothing more but spread out the payments over time. While these loans certainly make sense and can be a good deal, they are usually anything but free.

You will quickly realize this realty when you ask the dealer “Is there any discount if I pay cash today?” The answer is often “yes.” If this is the case, the 0% loan option really isn’t free. In fact you can quickly determine what pseudo interest rate you’re paying.

Example

New car price - $30,000

Option A: Financed over 5 years at 0% interest

Option B: Pay cash, $3,000 discount offered

That $3,000 discount offered by paying cash is what you miss when taking option A. Using a 5-year present value schedule, you’ll find your effective interest rate is 2.13% (not 0%!).

Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.