Advantages and Disadvantages of Auto Financing at 0% APR
If you are planning to buy a car in the near future, you may have considered a model with a 0% APR financing agreement attached to it.
These offers are touted as fantastic deals by sellers, but you are probably wondering “what’s the deal?” ”
There are all kinds of questions you ask yourself before buying a car: How to rate my car, then sell it? How does this affect my budget? Can I afford to buy cash or do I need to use finance? What are the advantages and disadvantages of 0% auto financing?
We have put together an explanation here to help you answer this last question, in the form of a list of the positives and negatives of choosing 0% auto financing. Before you do that, however, you need to know what 0% auto finance really is.
0% auto financing explained
Usually, when you take out a loan or auto finance, you pay interest on the borrowed money. With 0% funding, this is not the case. It’s all in a nutshell: the amount you will pay over the term of the finance is the same as the price of the car. There may be other charges, but they are not the same as interest on a loan.
There are two main types of auto financing: PCP and PCH. Personal contract purchase is the most popular type and at the end of the contract this allows you to buy the car with a final payment while personal contract lease is what is written on the tin: a long term rental rather than a purchase.
Funding with 0% APR are great if you want to buy the car, as you won’t need to pay more than the list price. With PCH or rental, it just helps lower monthly costs.
You should check the finer details before accepting a finance agreement. Make sure you know the length of the contract, the mileage limits, how much you can afford to pay each month, and how much you will need to pay at the start and end of the term.
There are penalties for things like damage to the car or going over a mileage limit, so make sure you are aware of those things too.
Benefits of 0% auto financing
- You can get into a new car that you might not be able to afford in cash otherwise
- You won’t be charged extra for paying over months and years – it’s not more expensive than buying everything all at once
- Even though you can afford to buy cash, you will avoid having to spend a large chunk of your savings all at once using finance.
- You might be able to afford a car that you couldn’t otherwise consider as it was previously out of your price range.
Disadvantages of 0% auto financing
- Offers with 0% APR usually require a larger deposit than an offer added by interest
- The terms tend to be shorter, which usually means it costs a little more per month to pay off the loan.
- You must have an excellent credit history to be eligible for a 0% APR
- Using finance is always a risk as your future circumstances might change and you might not be able to make repayments