7. Consider paying interest

Zero-percent financing is like a dinner bell; car dealers ring it and customers come running. After all, it sounds like a great deal when you consider that your local bank will probably charge a 5 to 10 percent interest rate for the same loan, depending on your credit. The reality is that you can’t get a loan for nothing, no matter how many 0 percent stickers are attached to it.

“The marketing is very cleverly done,” [Viraf] Baliwalla[, owner of Automall Network]* said. “The dealer will often offer something like a $3,000 rebate or zero percent financing. Most people jump at the 0 percent because they think it’s free money. The trouble is that the $3,000 you’re passing up is really not a rebate. It’s you prepaying the interest over that period of time.”

Baliwalla recommends comparing the two options on a spreadsheet to see which one comes out on top. In many cases, the rebate wins hands down.

*I copied this from para 2 of the website.

1. What are the trouble[s]? How's the marketing 'very cleverly done'? What cons or frauds is the dealer attempting? Here's my understanding of para 2 above: if you reject 0% financing, then the dealer offers you a $3000 rebate, which decreases your total car price by this amount, but at a future date. If you choose 0% financing, then there is no $3000 rebate, which implies that your total car price is higher than it would, if you had rejected 0% financing.

2. What if the dealer just offers 0% financing or a lease with an interest > 0% without any rebate option? I assume that I'm not paying cash for the total car price upfront.

2 Answers 2


Here's a number-crunching example of how the "Zero interest rate" offer is misleading.

Suppose the offer is that a car "costs $24,000.00 with zero percent financing over 24 months" or as an alternative, "$3,000.00 off for cash".

Ignore the hype: the quoted prices and the quoted interest rates. Look at what really happens to two people who take advantage of the two offers,

One person hands over $21,000.00 cash, and leaves with the new car.

The second promises to make 24 payments of $1000.00, one a month, starting in one month's time, and also leaves with the same make and model new car.

The two people have received exactly the same benefit, so the two payment schemes must have the same value.

A mortgage program will tell you that paying off a $21,000.00 loan by making 24 monthly payments of $1000.00 requires an interest rate of 1.10% a month, or an effective annual rate of 14.03%.

  • +1 This is a great way to explain it. However, when I calculate the APR, I get 13.2%. Either way, it is certainly not a free loan.
    – Ben Miller
    Dec 24, 2014 at 18:51
  • 1
    APR is often ambiguous. I raised (1+1.10%) to the 12th power for the effective annual rate; you multiplied by 12 (I think) to get the nominal annual rate, compounded monthly...
    – DJohnM
    Dec 24, 2014 at 20:36
  • @User58220 You calculated the APY.
    – Navin
    Dec 25, 2014 at 1:45
  • 3
    I'd also consider the loss of use of the $21,000 for three years.
    – chili555
    Dec 25, 2014 at 2:18

The car deal makes money 3 ways.

  • If you pay in one lump payment. If the payment is greater than what they paid for the car, plus their expenses, they make a profit.

  • They loan you the money. You make payments over months or years, if the total amount you pay is greater than what they paid for the car, plus their expenses, plus their finance expenses they make money. Of course the money takes years to come in, or they sell your loan to another business to get the money faster but in a smaller amount.

  • You trade in a car and they sell it at a profit. Of course that new transaction could be a lump sum or a loan on the used car...

They or course make money if you bring the car back for maintenance, or you buy lots of expensive dealer options.

Some dealers wave two deals in front of you:

  • get a 0% interest loan. These tend to be shorter 12 months vs 36,48,60 or even 72 months. The shorter length makes it harder for many to afford. If you can't swing the 12 large payments they offer you at x% loan for y years that keeps the payments in your budget.

  • pay cash and get a rebate. If you take the rebate you can't get the 0% loan. If you take the 0% loan you can't get the rebate. The price you negotiate minus the rebate is enough to make a profit.

The key is not letting them know which offer you are interested in. Don't even mention a trade in until the price of the new car has been finalized. Otherwise they will adjust the price, rebate, interest rate, length of loan, and trade-in value to maximize their profit.

The suggestion of running the numbers through a spreadsheet is a good one. If you get a loan for 2% from your bank/credit union for 3 years and the rebate from the dealer, it will cost less in total than the 0% loan from the dealer. The key is to get the loan approved by the bank/credit union before meeting with the dealer. The money from the bank looks like cash to the dealer.

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