0% Financing: Deal or No Deal

Being the super spy that I am, between sleuthing around, reading money articles, and listening to the Dave Ramsey Show, I see/hear a person or two, once in a while, who think it’s a good idea to borrow money on a house or car, when they have the money, instead of paying for it outright, so that they can invest said money in the stock market.

The theory is that they can make more money overall this way. But anyone with any sense can see that this is silly on something like a house because you’re trying to out-earn the interest you’re paying on your home, and in the long run, you lose. But what about 0% interest car loans? Is that smart?

NO.

There ya go. Super simple. But here’s why. One, if you finance the car over 5 years and financed a $25,000 car, you’ve lost $15,000 in value in five years. So I hope you made AT LEAST 60% on your money over that five years. And that’s just to break even.

Oh, you mean you didn’t? Well, congratulations, your butt lost money.

Two, you left risk out of the equation. What if you find yourself downsized and are unable to make the car payment? Now you’ve lost all the money you’ve paid into the car when they come to repo it, unless you want to use that invested money that you made 60% on to pay your bill so you can keep it. Oh, by the way, when you access that money, it’s subject to income or capital gains tax, which is guaranteed to eat another 50% of that 60% you made. And, oh, by the way, if you do keep the car, you’ll be paying interest from here on out and that includes back interest going all the way back to the moment you signed the note. That’s right, all those months of 0% interest are now negated. Congratulations.

What if you don’t lose your job and someone crashes into you instead? Congratulations. Enjoy the current value check your insurance is going to write you, assuming it wasn’t your fault. Oh, you owe more on the car than what it’s worth? Shocker. Guess what, you have to pay the difference. Where is the money going to come from?

If 0% was a good deal for you, guess what, THE DEALERSHIP WOULDN’T OFFER IT! They are not in the business of doing things that are good for YOU. Please don’t be so stupid to think that charming, well-dressed salesman is your friend. The only thing he cares about is getting a car off the lot. They have quotas to make, and if they’re going to stay in business, they need to turn a constant profit. Guess what, most dealerships do very, very well.

So, let’s assume no one crashes into, you don’t lose your job, and you don’t plan on investing the money because you actually don’t have it, keeping in mind that you also don’t mind throwing money out the window to the tune of $15,000. Is it a good deal then? After all, you’re not paying MORE for the car in the long run.

Again, and I can’t say this enough, if this was good for you, the dealership wouldn’t offer it. There are fees and all kinds of fun crap hidden in the paperwork you’re not reading. And if you finance the car, you’re forgoing a deal somewhere else – a deal that could make even financing at 7% a cheaper option in the long run. Don’t be distracted by the shiny shiny lights. This isn’t a case of “it’s too good to be true.” It’s a case of getting tricked into thinking buying a brand new car is a good deal, and it never is. (The zero percent is only on new cars, in case you haven’t figured that out yet.)

The biggest reason the dealership wants you in a new car is so you can drive the value down and trade it back in to them in a few years for another new car, making used cars for the people who don’t want to waste money on a new one. This is like buying last year’s iPhone when the new one comes out. Last year’s is perfectly fine, and oftentimes, you can’t even tell the difference.

The bottom line is, it’s still debt – you are making payments – sending money to the dealership instead of investing or saving up for something special or fun. This is money you’re spending every month to pay for a car whose value tanked as soon you as signed the paperwork. It’s better than paying interest on it, but the dealership still owns the car until you pay for it. And never forget, if you miss one payment, or make even one late payment, kiss the 0% goodbye.

Owning a car feels far better than paying for it.  🙂

Hi ^_^