When looking at buying your new car, you may have come across a very attractive looking option: the 0% car loan.
Anything with zero percent in the name has to be a good thing right? Usually we’re used to seeing steep interest rates attached to all sorts of loans, especially car loans in Toronto.
But interest rates are an intrinsic part of any loan according to conventional wisdom. After all, the media always makes a big deal about any hike or drop in the key interest rate.
So what exactly are 0% car loans and how can they work?
Here we look into the murky waters of zero percent car loans, what to keep an eye out for when considering one, and whether they are worth it at all.
What is interest?
Before we can understand what a zero percent car loan is, we first have to understand what exactly interest is.
Interest is the fee that is charged by a lender for the service of lending their money. The entire model of lending and borrowing is built upon this mechanic; without it there would be little incentive for lenders to, well, lend.
Interest is typically calculated in the form of a percentage of the balance of the loan added onto each repayment. This can be compounded daily, weekly, monthly, or yearly, and acts as the profit for the lender.
The interest rates that are charged on any loan are influenced by many things including the economy, the lender, the type of loan, and the credit score of the borrower. The Bank of Canada sets what is known as the key interest rate, which is the interest rate that typically influences all other interest rates charged in Canada.
In the history of the key interest rate it has never been set to 0%, which means the government has always charged at least some interest on any credit or bonds it has offered, which means it has always cost banks to lend money too.
So how can a car dealer offer a zero percent car loan in Toronto?
How do 0% loans work?
A zero percent car loan is essentially borrowing money without paying for the privilege to do so.
When your loan comes with zero percent, your monthly repayments would consist of nothing except equity in your car – a simple division of the principal loan amount divided by the number of months your loan agreement term is for.
This is the dream scenario for any borrower, as it acts more like a loan you might get from a friend or relative. If you remove the interest from a loan repayment, your repayments will be significantly lower and you won’t feel as if you are burning up money for nothing.
However, removing the interest rate also effectively removes the incentive for lenders to offer credit so there is more going on with a zero percent loan than meets the eye.
Too good to be true
If something sounds too good to be true it probably is, and this applies to zero percent car loans in Toronto as well.
While there are a small handful of legitimate zero percent car loans, usually only offered by the actual car manufacturer, the vast majority are fraught with hidden charges and stipulations.
Perhaps the most common tactic that car dealerships use when advertising a zero percent car loan is to over inflate the sticker price of the car from the outset.
Car dealers usually calculate how much interest a typical car loan would have earned them over the life of the loan and then add that amount onto the base price of the car. They can then offer that car for “zero percent interest”, but in effect you are paying that interest in the form of an exaggerated principal loan amount.
Make sure you pay attention to what a car is actually worth before signing on the dotted line for a so called no interest car loan, as there is a good chance that interest you are not paying has actually already been factored into the price.
Another common ploy used by car dealerships when offering zero percent car loans is to advertise them prominently to draw customers in, but then set the minimum credit score required to be so high as to disqualify almost all customers.
By setting the credit score requirement in the high 800s, all but the most perfect credit histories will not meet that threshold. However, the car dealer now has that customer in the store and so can proceed to offer them an interest rate that is perhaps higher than they would have accepted otherwise. Using high pressure sales tactics and the element of convenience, you might be surprised how often this bait and switch model works, and people can often walk away with a car loan that is significantly over priced.
It is worth remembering there is no such thing as a free lunch, so don’t assume a zero percent car loan in Toronto is any different.
Things to watch out for when applying for a zero percent car loan
Let’s assume you are considering applying for a zero percent car loan. Here are a few things to keep an eye on when attempting to get for one of these tricky loans.
Your credit score
The absolute best thing you can do to help your chances in securing a legitimate zero percent car loan (or as close as humanly possible to it) is to have the best credit score you can. Obviously this will depend on your personal circumstances and your credit history, but generally anything in the very good or excellent range (750+) will be in a reasonably good position to qualify, or at least negotiate, for a zero percent car loan.
If you have bad credit, you may not qualify for a zero percent car loan, but you can still get a good interest rate on your next loan. Autoloan.ca specialises in bad credit car loans, and doesn’t take ‘No’ for an answer when negotiating with Canada’s top banks. We treat every client with respect and pride ourselves on our commitment to customer service and support.
A bad credit car loan in Toronto can even be a great way to rebuild your credit score, as regular on time repayments will help improve your credit history. Then, when the time comes to negotiate a new car loan, you will be in a better position to secure a lower (or even zero percent) interest rate.
The worth of the car
Something to be very aware of is the actual market value and RRP of the car you are interested in purchasing.
As we mentioned above, one of the sneaky tactics many car dealerships use when offering a “zero percent” car loan is by actually building the interest into the price of the car from the outset. This will lean the principal loan amount will be approximately equivalent to the total amount of money you would have paid with a normal interest rate loan.
Thus, it pays to do your homework on how much your desired car is actually worth today. Look at the manufacturer’s website, check other dealerships, have a look at what the same dealer you are at would offer that car on a normal interest rate loan. It may be unavoidable to pay a slightly higher sticker price than the normal price, but anything too significant can indicate you are being taken advantage of.
Don’t be afraid to say ‘No’
Perhaps the biggest thing you need to be prepared for when you go in to attempt to get a zero percent car loan is to say ‘No’.
Car salespeople can be notoriously aggressive when it comes to closing a deal, and so they may resort to some high pressure sales tactics to ensure you sign the paperwork. Depending on your disposition this can be something you can ignore or it can be so stressful you agree to the deal simply to get out of the situation.
Remember that no one can force you to sign up for a deal you are not completely happy with, and that there are plenty of other dealerships you could go to for a better deal, or at least a less stressful sales process. No matter what your credit score, you are usually in a position to negotiate with the dealership as without you, they don’t make any commission regardless.
Stand your ground, ask calmly for their best deal, crunch the numbers on any offers they make, and ultimately don’t be afraid to walk away from the table if you don’t believe you are being offered the best.
Zero percent car loans in Toronto are usually too good to be true. No lender really wants to give away their money and not expect anything in return, so keep that in mind before you get dazzled by any zero percent car loans out there. There are often hidden costs built into these kinds of loans, and they may actually end up being more expensive than a normal loan.
If you are looking for a car loan with honest, low interest rates on a huge range of cars, Autoloans.ca is the place to go. We make securing the lowest possible interest rate our top priority, and with a range of over 7,000 vehicles to choose from, you’ll always find something you’ll love. Contact us today and get on the road tomorrow.