Can you really buy a car without paying any interest?
A new car has caught your eye, and you've decided to buy it. That's great, but one question remains: how are you going to pay for it? Some car dealerships are straight in with an answer and hope to win customers over with a tempting offer: pay the car off at a very low interest rate or even interest-free. If it sounds too good to be true, it just might be. It never hurts to read over the terms and conditions…
Buying a car on finance?
If you don't have enough cash to cover the full price of your new car or you want to hold on to that nest egg for a little while longer, then a car loan is a great solution.
A low-cost car loan would obviously be the preferred option, because why wouldn’t it be? That being said, you should exercise caution if a dealership allows you to pay the car off interest-free or at an interest rate of 0.5%. You should watch out for potential drawbacks which could leave you paying more than you would for a standard car loan.
If you want to buy a car with an interest-free loan, bear these questions in mind:
- How much is the down payment? This can often be as much as 30% of the purchase price.
- Do you get any additional discounts? If you opt for a loan on which you pay very little or no interest and that loan is provided to you by the party selling the car, chances are you won’t get any additional discounts. That means you should work out if you would be better off paying slightly more interest on your car loan so you can benefit from the additional discounts instead.
- Is there a larger final payment? These types of loans are often shorter in length, which means that the last monthly instalment is a pretty hefty sum. They're also known as ‘balloon’ loans. If you don’t make the last payment (the ‘balloon’), the car dealer could instead decide to take the car back. But be careful: if the car's in poor condition, they may refuse to.
- Is there an extended warranty? Customers are sometimes required to take out an extended warranty costing somewhere between 500 and 800 euros, and this usually isn’t mentioned in the adverts.
- How much exactly do you pay each month? Don't forget to factor in additional costs such as the loan origination fee and additional compulsory insurance.
- Who owns the car? It may be the case that you don’t actually own the car until it's been fully paid off. This means that, if you want to sell the car, you first have to get permission from the dealer.
- Will you be getting a fair trade-in deal on your current car? It could be that you also want to factor your present car into the loan negotiations. If you do, make sure that the dealer doesn't undervalue it. This can be a sneaky trick that a dealer might try in order to squeeze the most financial benefit out of a zero-interest instalment plan.
Conclusion: if you want to buy a car with an interest-free car loan, you should always check the small print to make sure you know all the terms and conditions first.
Consider this example before buying a car with an interest-free loan
The cost of a new car can easily reach 20 000 euros. If you take out a loan at an interest rate of 4.39% to buy it, you’ll pay 878 euros in interest over 36 months, which means you’ll save 878 euros if you opt for interest-free loan. But as mentioned above, the chances of getting any additional discounts are slim. You should definitely look into this, because dealers often offer discounts of 3 to 19%. In this example, that would amount to a discount of between 600 and 3 800 euros. In other words, you may be saving money when you opt for a standard car loan.
Comparing car loans
All of this means you shouldn’t compare car loans just by looking at the different interest rates. A standard car loan at least ensures you won’t face any surprises: you know exactly how much you're going to pay each month right from the outset and the fixed interest rate won’t budge an inch throughout the full term of your loan. That means you should always consider whether it’s really worth sacrificing your peace of mind for what little you might stand to gain.