A member recently wrote the following:
On your electronic sign on 581, I think it is rather interesting that right after your ad for car loans starting at 5.49%, there is an ad for car loans for another financial institution starting at 0.00% APR. Hmm…I wonder who is getting their money’s worth out of that ad…
I’d like to address this. Not to pick on the member (I’m not), but because he or she brings up a valid point that I’d like to talk about in more detail.
First of all, there is a mistake in the member’s post: it was not an ad for another financial institution. It was an ad for a particular brand of Saturn car. This is not nitpicking — it’s really the reason for this post.
You will never find a financial institution of any kind offering 0% car loans, for one very simple reason: they cannot make money on it. Ever.
So why do car companies do it? And how do they make money?
The short answer is that they don’t make money on the loan. They can’t. You can’t lend out money with a multi-year repayment term that pays no interest and make money. It’s not possible.
Car companies make money on the service after the sale. At least that’s the idea. They hope to entice you to buy a new car that you will maintain at the dealer, and that’s where they’ll make the money. Since financial institutions have no way to service your car (and don’t want to), this isn’t an option for them.
So what should you do?
Simple. If you can find the car you want for 0% and can afford the monthly payment, buy it! It used to be that the 0% financing was limited to no more than 24 months, which mean that on even relatively inexpensive new cars the monthly payments even without interest would be more than a consumer could afford. But hey, the 0% got you in the door, at which point the dealer could then counter-offer an interest-bearing loan so you could get the car you wanted.
The collapse of the auto industry has made auto makers desperate, so now we’re seeing 0% financing extended all the way out to five years, and sometimes six. But they still usually restrict it to one specific model at a time, so if you don’t want that particular car, you’re out of luck.
The moral of the story: if you can find the car you want at 0% and the term is long enough that you can afford the monthly payment, buy it! (I know I would!) Free money is always the best deal in town.
But make sure it’s a car you want. I also know there’s nothing in the world right now that would make me buy a Saturn since the brand is shutting down next year. (And before happy Saturn owners flame me, that’s no slam on the car itself, just the fact that GM is closing the doors. I wouldn’t buy any car from a company that is going out of business.)
