What’s the Catch?

Rapid Finance on 29 May 2015

Car yards often advertise “0% finance”. How does this actually work? What is the catch? What should I look out for?

You’ll often see promotions like this when manufacturers want to clear out old stock. In order to shift big numbers, franchise dealerships and manufacturers team up with a finance company and put together an offer that sounds too good to be true – like “0% interest for 12 months”.

So how exactly do they make money from these promotions? After all, the finance company has to make its interest somehow...

Jacked-up Prices

There's no such thing as a free lunch

purchasing car

In these cases, the manufacturer is compensating the finance company for that lost interest – and increasing the price of the car to cover the difference. So if you walk into a Toyota dealership advertising 0% finance, a car that should be costing you $20,000 may cost you $23,000 – or more. The car and the finance are bundled together, so you’re none-the-wiser.

While the 0% interest means you’ll save on your loan repayments, the car value is offset to compensate – so your total loan amount will be inflated.

And because the deals so often apply to older stock, that price mark-up means you may see a brand-new model advertised just weeks after driving off the forecourt – for the same price you paid.

Dealers and manufacturers also use this trick when they want to increase market share – which begs the question, “Why hasn’t this car sold well so far?”

After that interest-free first year, the rate can jump up considerably - and may be much higher than other comparable loans.

Lots of hidden costs

As well as inflated sale prices, there are several other ways the finance company recoup those 12 months of lost interest.

While the interest-free period generally lasts 12–14 months, the loan term may be anything from 2 to 10 years. So after that interest-free first year, the rate can jump up considerably – and may be much higher than other comparable loans.

There may also be early payout fees and additional payment penalties to encourage you to stay the course of the loan.

The price of convenience

research finance

Car dealer finance is generally set up to capture unprepared customers at point of sale, so it does provide a convenient facility if you suddenly go from browsing to buying.

The trick is to be well-prepared before you go looking for a car. If you think you may need finance, shop around and look at comparison rates so you can see how the dealer’s finance stacks up to other loans on the market.

It may even be useful to have previously arranged finance, though it’s also wise to avoid having several lenders checking your credit file in a short space of time, as this can look suspicious to lenders.

Call the experts

To get the best of both worlds, call Rapid Finance. We’ll endeavour to find a loan suitable for your circumstances – whether it's a secured car loan or other car finance – and can compare offers from different lenders with only a single credit check.

With over 2 decades of experience, Rapid Finance has built a reputation of matching our clients with the right lender. No matter your situation, we could help you find a suitable car loan for you.

Call 1300 467 274 to discuss your situation today.