It was only a matter of time before subsidized interest rate programs became the rage in Australia. They have been prevalent in the US car market for many many years, and as the new car sales market in Australia slows down the manufacturers and their financing divisions need to come up with innovative strategies to try and sell more cars.

The important thing to try and remember is there is no such thing as a free lunch!!! Zero percent interest rates are simply not real as interest rates in this country are not that low.  How these programs work are as follows:  Basically the manufacturer gets together with their in-house financier (who they own) and they build enough margin /gross into the price of the new car (which you pay for) to cover the difference from a “zero” percent finance charge to a true interest rate charge of say 7% for example. So what you don’t pay in interest, you just pay via an inflated price of the car. Instead of you buying the car say for $40k, you pay $46k and the $6k difference goes from the manufacturer back to their financier to cover the interest. The low rate of interest is designed to take your eye off the true starting price of the car.  

We have had numerous wins for our clients where the car buyer we recommend has been able to negotiate a price thousands of dollars better by saying no to the zero percent programs. The same car that the client would have paid $50k for under the interest free program, he has paid only $43k for – and the client has paid LESS BACK on the finance that we have sourced at a good commercial rate.

There are other pitfalls of these low interest rate programs, for example the manufacturer usually tries to steer you into a slow moving model or old stock; they will push you into the car they want to sell, not the car you want to buy.

There is also a lot of fine print regarding the terms and conditions of the loan which are normally not negotiable – for example you may be required to put in a certain level of deposit, or you may have to do the loan over a short (3 year) term. There are also normally heavy exit fees if you try and pay these loans out early – traditionally car owned financiers don’t offer much, if any, rebate of interest charges if you happen to pay the loan out early, and this can cost you thousands!

So the motto of the story is – zero percent interest rates sound great but aren't true - you just pay for this in the (inflated) price of the car.

An update to our 0% Finance article:

4/12/2012

Murray Price had warned us "buyer beware!" a few weeks ago with his article on 0% finance deals; now others are picking up on the fact that finance deals offered by car dealerships are not always as good as they sound! Here is a real example of why you don’t accept dealer finance! CF&L will always tell you the REAL cost of finance, call or email us for a detailed quote.

Car loan-tricks-and-traps - as seen on Today Tonight