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August 07, 2013 | auto

What Everyone Should Know About 0% Offers

We've all seen the ads on television for a new car or truck with 0% financing. What a deal! Buy on credit with no interest — it's like using someone else's money!

Not so fast. Zero-percent financing can cost more than you think. Here's what you should know about this special financing arrangement before you run off to the dealer.

Zero Percent (0%) May Offer Fewer Choices

Just like grocery store specials, zero-percent financing offers can be a lure to get you in the door only to find that the "special" isn't quite what you wanted. Zero-percent offers usually apply only to certain models or brands. Your choice may also be limited to the dealer's stock on hand, which means you might not get the color, style, or options you want.

In many cases, dealers are looking to move "loaded" vehicles. Unwanted options can drive the sticker price up 25% or more, lessening your ability to negotiate a better price on the new vehicle or for your trade-in and costing you more than you really want to spend. Those unwanted extras can add up to more than a reasonable interest rate would have cost over the life of a loan on the vehicle you really wanted.

Do You Even Qualify for "Free Money"?

According to a Consumer Task Force for Automotive Issues survey, fewer than 10% of all applicants meet the strict credit criteria needed to qualify for the zero-percent rate. Those with less-than-perfect credit get bumped up to a higher-rate loan, and dealer financing can often be more expensive that a loan you get through your bank or credit union. Credit unions usually have the lowest rates and fees because they are not-for-profit cooperatives.

Also, many dealer loans require a shorter payback term, making your monthly payments less manageable. You may even have to make a larger down payment and be subject to bigger prepayment penalties if you don't have your financing in hand when you walk in the door.

Make Your Best Deal with a Pre-Approved Loan and Smart Negotiating

Want to make the best deal? Take rebates instead of special financing, negotiate a good price, then come to your credit union for financing. You'll find competitive rates on new and used auto loans, and you can get pre-approved in minutes. Even better, get pre-approved before you start shopping so you know exactly how much you can spend and you can make the deal the minute you feel you've negotiated a deal you like. Being ready to buy gives you more power in any negotiation.

This chart illustrates your potential savings when you negotiate for rebates and use a low-cost credit union loan instead of seemingly low-cost dealer financing that precludes rebates:

New Auto Financing: Car costs $20,000

Calculate your auto loan and potential auto loan rates with our handy term chart.

* Credit Union APR for illustration only. Click here for current loan rates.