0% car finance deals: what to check before you sign

Zero per cent finance offers are common in spring. The interest rate is only one part of the cost, so compare the car price, fees, term and comparison rate.

A 0% car finance deal is only good value if the total you pay for the car and the loan is lower than your other options. Before you sign, check the drive-away price, any fees, the comparison rate, the loan term and which models qualify, then compare the offer against an independent car loan quote.

Spring is one of the busiest periods for car sales, and zero per cent finance offers are common this time of year.

On the surface, borrowing money at no interest looks like a great opportunity. But the interest is only one component of the total cost of a car purchase, and focusing on it alone can lead to problems in the future.

Check these four points before you commit to a zero per cent finance offer.

1. The interest cost has to come from somewhere

Lenders and manufacturers do not absorb the cost of providing zero per cent finance out of goodwill. The money they give up in interest typically gets recovered through other parts of the transaction.

This might include:

• a higher vehicle price than what a cash buyer might negotiate
• reduced scope to get a discount, free extras or a better trade-in price
• higher fees embedded in the loan contract
• a shorter repayment term that increases the monthly obligation

While the headline interest rate is zero, the total cost of the transaction may be a lot more. Ask the dealer for the drive-away price with and without the finance offer. If the price drops when you don’t take the 0% deal, the difference is the cost of the finance.

2. The comparison rate is the number that matters most

Lenders are required to display a comparison rate alongside the advertised interest rate. The comparison rate factors in fees and charges as well as the interest rate, giving a more accurate picture of the true annual cost of the loan.

On a zero per cent loan that carries significant establishment or ongoing fees, the comparison rate may be considerably higher than zero. Comparing the comparison rate on a dealer finance offer against what an independent lender would charge on a standard car loan is a more reliable basis for assessing the real cost than the headline rate alone.

Comparison rates are calculated on a standard loan amount and term set by law, so the figure may not match your exact loan. Ask for the total amount you’ll repay over the loan, including all fees, and use that as your benchmark. Our guide to securing a competitive car loan interest rate explains the other factors that drive the rate you’re offered.

3. Zero per cent offers often come with restrictions

Zero per cent finance is rarely available across an entire vehicle range. Offers are typically limited to specific models, often those with slower turnover, previous year stock or demonstrator vehicles.

Eligibility requirements can also be more stringent than for a standard car loan. Some offers require a strong credit history, a substantial deposit or a short loan term that pushes monthly repayments higher than they would be on a longer-term standard loan. Read our guides on how much deposit you need for a car loan and how credit scores shape car loan outcomes if either could be an issue.

Understanding the specific conditions attached to an offer before you fall in love with the deal is an important first step. Check:

• whether the offer ends on a set date or when stock runs out
• the maximum loan term and the minimum deposit
• whether a balloon or residual payment is built in at the end
• whether the offer applies to private buyers, ABN holders or both
• any fees for paying the loan out early

If a balloon payment is part of the deal, read how balloon payments on car loans work before you agree to one.

4. Independent finance may work out more cost-effective overall

One of the tests worth running before accepting a zero per cent dealer offer is to get a finance quote and see what the same car would cost through a different lender.

A buyer who secures their own finance and then approaches the dealer as a cash buyer may also have more room to negotiate on the vehicle price, which can offset the interest cost on an independent loan. The total price paid for the car and the loan combined, rather than the interest rate in isolation, is the figure that determines which option is more cost-effective.

Trading in your current car adds another variable. Dealers sometimes offer a lower trade-in price alongside a finance special, so value your trade-in separately. Our tips on maximising your car trade-in value can help.

Get a quote before you visit the dealer

Arranging finance before you shop gives you a firm budget and a benchmark to test any dealer offer against. A finance broker can compare car loans across a range of lenders and, if you’re buying through your business, business car loans as well. Attain Loans is a finance broker in Melbourne’s west that compares car loan options for private and business buyers, subject to each lender’s assessment.

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Consider whether it’s appropriate for you and speak with a licensed professional before making a decision.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.