Recently, a car ad trumpeting 0% financing caught my eye. Sounds great! I’ll take it. Just give me a 25-year amortization at 0% and I’ll drive off in my new car. Fat chance. The car company would never agree to this arrangement because the financing isn’t really at 0%.
If I could get this deal for a $30,000 car, the payments would be $100 per month for 25 years. At 4% inflation, the last payment would have the purchasing power of $38 in today’s dollars. That would be a very sweet deal, especially if $30,000 was the final price after negotiation rather than the inflated asking price.
In reality, we get to choose either a price discount (cash back) or a low financing rate for just a few years. This proves that the real financing rate is much higher than advertised. No doubt car marketers know how to avoid breaking the law, but why is this type of advertising permitted?
This reminds me of the deal my parents were offered when they bought their first house. They could get the house for one price, but if they paid a few thousand more, they would get a free car as well. This is a curious use of the word “free”.
Even for people who understand that the financing rate is really much higher than stated, the effect of these games is to confuse the consumer. One way to sort things out somewhat is to check what loan terms you can get from a bank to compare them to the car company’s financing terms.
Take the car’s price (after negotiating it as low as you can) less the cash back and talk to your bank about what the payments would be. Compare this to the car company’s payments (for the same number of years of payments). This will give you an idea of how the car company’s real financing rate compares to the bank’s rate.