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31 July 2013 Posted by 

Why beware of zero per cent car loans

By John Cadogan

MORE car manufacturers are using super low finance rates or 0% finance rates in their marketing to entice clients into their showrooms.

However, are you truly getting the best overall deal by accepting these offers? The reason we are seeing more of this is because the mainstream motor financiers and banks have opened up their restrictions regarding allowance to advertise these rates in order for the dealerships to provide “sub-vented” finance plans.

Prior to now, it was mainly just the manufacturers that had their own finance division offering “sub-vented” finance.

So how is it possible?

If these rates were truly available with absolutely no catches, then why aren’t these rates available on lower risk assets, such as property?

Obviously there has to be a catch and often you won’t find this out until you actually go into the dealership to find out more. The hardest part of the sales process is actually getting the customer to come in to discuss what is on offer to open up the opportunity for negotiation.

Now with technology, this is even harder as more information is available in many different formats of media, giving customers more information prior to engaging with any retailer.

This is how it works

The manufacturer provides the dealership with certain “bonus” discounts on various models in their range, which would allow the dealerships room to negotiate on certain models at certain times.

These bonuses would usually be for a limited time and may correlate with their other marketing campaigns. Although you may be able to discount to a certain level whilst taking out some of these low interest rate offers, the manufacturer will not allow certain bonuses on that model car if you were to use the low interest rate offer.

At times, the manufacturer may stipulate that you pay the full recommended retail price also, without any discounts available.

Often you could get a far greater discount on the actual purchase price of the car if you weren’t using their finance campaign, and on many occasions, your actual payments could be lower by sourcing the finance yourself and negotiating a better price on the car, although your interest rate is much higher.

Recouping the interest loss Basically, the manufacturer is recouping the interest loss from the finance, from the profit in the car and the lender providing the “sub-vented” finance is being reimbursed directly from the manufacturer.

The client is actually overpaying for the car, just to get a low rate, which can be a very costly mistake if all options aren’t explored.

The other catch that may be attached to these offers, is the inflexibility of the loan structure. For example, the requirement may be that the loan can only be taken out over 36 months or less, which could put your repayments out of your own personal budget, or another common catch is that you have to provide a large deposit, sometimes up to 50% of the purchase price of the car.

The reason this is done, is to reduce the amount of interest lost from the sub-vented plan, by either shortening the term, or by reducing the borrowed amount.

It is highly recommended that when shopping for a car, that you do not purchase on the interest rate alone, as this may end up costing you more than if you researched all the associated costs, which would include the purchase price, the finance and insurance options and any other additional costs, such as options or accessories.

John Cadogan is a principal at CarLoans.com.au.

Visit: www.CarLoans.com.au for more information about car loan options.


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