Zero Per Cent Car Finance Trap

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Interest rates are at record lows, and as a result, a host of new car marketing campaigns centred on zero per cent finance have arisen. It’s an effective selling tool because it’s compelling … if you don’t think about it too hard. But if your IQ is in fact greater than the room temperature (in degrees C) there’s something decidedly wonky about zero per cent finance.

It sounds unbeatable, but upon closer inspection it’s bullshit. Here’s why.

Zero per cent finance is an too effective tool for upping the inquiry rates at dealerships – and that’s important because getting people through the door is half the battle. Zero per cent finance is a strong advertising proposition because it’s too good to be true. You want it because it’s better than you thought possible. Whether it’s actually a great deal for you is another matter.

Zero per cent finance works like this: The interest is there; you just don’t see it … but you certainly pay it – ultimately. The carmaker/car dealer actually pays the financier any interest due on the finance. And they pay it from the profit on the sale. (Doing it this way is also called ‘sub-vented finance’.) To make that a functional commercial proposition, the profit from the sale needs to be large enough to pay the financier any interest on the deal at whatever their negotiated rate is, and it also needs to line the dealership’s pockets.

Let’s be clear on this: Zero per cent finance is not a way for you to get something for nothing. Despite what the clever marketing suggests.

The financier still earns his interest. That interest gets paid by you – via the dealer. It comes directly out of the profit on the sale. So: guess what? The price of the new vehicle is usually non-negotiable.

It’s a con. Zero per cent finance is a carrot; non-negotiability of the price is the stick. And they really would like you to focus on the carrot, because the stick is unpleasant.


Zero per cent finance is commonly used to place buyers under pressure, by instilling a sense of urgency into the negotiation. (This fantastic offer is available only until the end of the week – decide now.) Most car dealership sales-closing strategies are designed to achieve quick commitment, and prevent giving buyers the opportunity to do independent research and compare their true alternative finance options. (Do it now; otherwise you’ll miss out.)

Smart car salesmen know that allowing you to leave the premises without the ink on a contract is a b-i-g mistake – because once you walk out that door the chances they will lose you for good jump dramatically.

(Incidentally, the prime motivation for you to move on is fear – fear you will miss out on a better deal elsewhere. That’s why they want you to think this is the best deal since the loaves and the fishes.)

What you must – must – do is consider the true cost of owning the vehicle under a range of finance alternatives. For example, if you borrow $23,000 for three years at zero per cent interest, you might believe you’re getting a great deal. (Especially in the moment, at the dealership, under pressure to sign.) What a bastard to arrive back home and do the sums, only to discover it is actually cheaper to negotiate a $3000 discount on the vehicle, and arrange your own independent finance for the remaining $20,000 at 7.0 per cent interest – inclusive of fees and charges.

You will probably discover that there are fewer restrictions on the finance if you arrange it independently.


You also need to be very careful with a trade-in, if you have one. Using zero per cent finance as a carrot, many dealerships will low-ball your trade-in to further boost their profit margins. (“The finance is unbeatable – in fact we’re losing money on it … so we a lot less room to move on your trade-in. That finance is where the savings really are for you.” Really? Cue the sick bag…)

Zero per cent finance deals in full-page newspaper ads and billboards is mainly designed to boost patronage at dealerships. More bums on seats equals more sales. It’s a numbers game. Some customers come through the door and buy vehicles but decline the zero per cent offer. That’s still a ‘win’ for the dealer, especially if they tick instead the dealer’s conventional in-house finance box. (Invariably also a rip-off.) Some come in and buy the vehicle with cash – or their own finance – after the advertisement tweaked their interest for the brand. That’s still a win. In all these cases the zero per cent finance advertising has still achieved its primary objective: increased sales.

More prospects means more sales means more profit. It also means more opportunity to ‘upsell’ products into the deals as well. Products like (rip-off) in-house insurance, (rip-off) accessories, (rip-off) window tinting, (total rip-off) paint protection, (total rip-off) rustproofing and (total rip-off) fabric protection. Many of these are items available at a significantly lower cost independently, and many (mainly the fabric, paint and rust protection) are of, at best, questionable value.


You owe it to yourself to minimize the cost of new vehicle ownership by declining to succumb to the pressure placed upon you to transact – now – at the dealership. Give yourself time to ensure you’re paying the lowest possible price on the vehicle. Ensure the trade-in price of your old is reasonable. Question which accessories and treatments you really need, and shop independently for them. And, most importantly, compare your finance options.

If you take only one fact away from this story, take this one: It’s always cheaper to walk into the dealership with your finance arranged to your terms, at the lowest possible rate – and then negotiate the sharpest possible price on the vehicle. (Watch my video on how to negotiate with a car dealer.) Compared with doing this, zero per cent finance is a comprehensive rip-off.