How Does Zero Per Cent Finance Really Work?

Those zero per cent new car finance offers you’ve seen. Don’t waste your breath enquiring. They’re a complete rip-off. Here’s why.


Zero per cent finance is absurd. So is one per cent. 1.9. Anything below four is a joke. Since when was finance free? When was the last time a bank opened its windows and started shoveling money onto the poor huddled masses beneath? What actually happens is: A big slice of the profit margin on the new car just becomes the interest, payable under the table to the financier.

When a dealer offers you zero per cent, the first thing you don’t get is a discount on the purchase price of the vehicle.

That'secause an even healthier profit margin is required to pay the financier, under the table. It’s called sub-vented finance, and it’s a con. A legal one, but still a con.

The dealer wants you to focus on the big, fat zero, or some other tiny number, and ignore the reality. But you don’t get anything for free. Mathematically, zero per cent over three years, is roughly equivalent to you negotiating a 10 per cent discount on the price, and then finding your own finance at about seven per cent. If you can negotiate 15 per cent off the price and find 7 per cent finance independently, or even get 10 per cent off, and find finance at six per cent, you’re gunna be well in front.

If you can’t find finance at those reasonable rates, you’re not looking hard enough. Plenty of reputable lenders have finance at six or seven per cent.

Fill in my contact form on the right at and I’ll point you in the right direction for low interest car finance from reputable lenders.

Here in Australia the automotive market is intensely competitive. Population: 23 million. Sixty-ish automotive brands and, broadly, one million sales. Competition is fierce, and the marketing spend per sale, is huge. One point five billion dollars above the line in advertising spend divided by one million sales is about $1500 per vehicle. And ultimately, you’re picking up the tab.

So, you’re at the dealership. That salesman needs to greet you and gut you – that’s his objective, because that money’s already been spent. The chrome, the glass, the cars on the showroom floor, the advertising. All spent this month. You walk in the door, they hate the thought of you leaving without the ink drying on a contract. It’s a commercial imperative.

Car dealers make a significant income from their finance business. It’s absolutely imperative for them to keep as much of that business ‘in house’ as possible. But it’s a bad deal for you. Zero per cent is highly profitable for them, which is why it’s bad for you.

Zero per cent also takes many independent financiers out of the mix. The car dealer says: Zero. Your financier says: 6.0. You think: zero beats six – simple. Only, it’s not that simple.

That playing field’s not level; you’re looking at an apple in one hand and an orange in the other.

If you’re in the market, you lob at a dealership and here’s this apparently ‘unbeatable’ offer – we’ve got zero per cent finance for you. You think, ‘great’. ‘Sign me up.’ That’s a mistake.

If the best the central bank can manage is two-and-a-half per cent on the cash rate, then zero per cent is a con. It’s a sales hook. Like, look over where while we slip the rabbit into the hat.

People choose cars sequentially. They go from dealership to dealership. The prime motivator to move to a different dealership is fear: the fear that if you buy here, now, you’ll miss a better deal just down the road.

Psychologists study this stuff. Behavioural researcher Malcolm Gladwell says people make important decisions using a process he calls “thin slicing” – by deciding what’s really important in a complex situation from a very narrow window of information. It’s a way of jump-cutting though complexity – but maybe not the best way when you buy a car. Smart car salespeople know this, and that’s why they want to hook you with just the right bait: the ‘unbeatable’ thin slice. The distraction. The misdirection. The smoke and the mirrors. Hey, look over here. Focus on the zero. Now, bend over.

On fundamentals, zero per cent finance is a joke – because if it’s true, somebody is losing a lot of money (and the car and finance industries have a solid, unified philosophical position on losing money). With zero per cent, everyone’s still getting paid – that’s why there’s no room to negotiate a real discount on the price.

If you tell them you’re not interested in the zero per cent offer, you’ll be amazed how malleable the price suddenly becomes.

Ultimately, you pay – either way. Zero per cent finance is just a magic trick. You suspend disbelief because you want to believe an unbeatable offer. Marry the supermodel, own the Bugatti, eat chocolate and still get a six pack without working out, come back from the dead, whatever. You want you to believe, so you become the architect of your own delusion.

The best advice I can give you is: separate the three transactions most people make when they upgrade their cars – buy the new car at the dealer (because you have to; it’s the only place they’re sold) but, secondly, arrange the best independent finance you can, and thirdly, dispose of your old car independently. If you do this, one transaction cannot be used by the dealer as leverage against the others. It slashes the number of opportunities for the dealer to hook, thin-slice and gut you. But it’s not as much fun as believing in fiction.

In the long run, it’s significantly cheaper to arrange conventional, competitive finance from a reputable, independent lender, and then drive a hard bargain at the dealership, buying the car.

Thirty grand at zero per cent is not as good as bargaining down to 26k and getting quality independent finance at seven per cent flat. Get your own finance and negotiate like you mean it. Or get Australia’s best car broker to do all that advocacy on your behalf. Fill in my contact form on the right and I’ll put you in touch.