Car Dealership Floor

    Scott Olson, Getty Images©

    by: Gary Hoffman | AOL Autos

    It’s one of the best-kept secrets of the car business: 0% car financing, one of the largest discounts a consumer could hope for in an entire lifetime of conspicuous consumption, remains stubbornly beyond the reach of most car buyers.

    The number of 0% deals has soared this year as domestic, Asian and European car makers strive mightily to breathe life into their U.S. car sales. It is not unusual for a manufacturer to put 0% deals on more than two-thirds of its vehicles. Many of them are the equivalent of a $2,000 or $3,000 rebate.

    And the very idea of 0% -- with its subtext of getting something for nothing -- lends itself to a simple yet powerful marketing message that car dealerships can promote in every medium, from cable TV to newspapers to Facebook. But, paradoxically, these deals can also squeeze out competing loans and pave the way for higher costs if a buyer isn’t careful, experts say.

    Hard To Get

    Moreover, they aren’t available to everyone. The programs exclude about 60% of the car buying public. The reason: Buyers with less than sterling credit generally do not qualify for them.

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    “The people who are going to take advantage of the 0% are the ones who don’t need it,” said Mark Dubis, a Cleveland-based dealership consultant and president of The Dubis Group. “And the ones who do need it can’t qualify it.”

    Automakers are notoriously tight-lipped about what credit scores are needed to qualify for their best financing rates. But Michael Royce, AOL Autos contributor, former car salesman and publisher of BeatTheCarSalesman.com, estimates customers may need at least a score of 680 to 700.

    Many buyers are already sitting across the desk from dealership salesperson when they find out they don’t qualify. That’s especially likely if they have a mediocre-to-low score and haven’t bothered to check it ahead of time.

    Other issues complicate the deals. For one thing, buyers tend to fall in love with cars -- not interest rates. So, once they see a dealer’s inventory, the particular model they may not feature the 0% deal that attracted them to the showroom in the first place.

    And if they opt for a 2011 model instead of 2010, the loan for the new 2011 often won’t carry the same four- or five-year term -- if the car even features 0% financing at all. And these days, a few 2010 models feature 0% deals that are for 36 months or less. During August, for example, offers for the 2010 Kia Soul, a Mazda CX-7, or a 2010 Ford Taurus were limited to three years. Relatively few buyers want terms that short.

    According to a recent Kelley Blue Book survey, 62 percent of car shoppers in the market for car loans right now are looking at financing over 48 or 60 months compared to 21 percent for 36 months.

    Still, consumer finance experts like 36-month terms: they keep the total cost of a loan down.

    Whatever the difficulty, buyers may be well into the buying process when they find out that 0% won’t work for them. So they may take the path of least resistance and accept an alternate financing option from the dealership without much quibbling.

    That could take away one of the buyer’s key levers in the negotiating process: the ability to play one financing offer against another.

    Hard To Walk Away

    A range of psychological factors come into play at that point, Royce says. Many people have a hard time exiting a sales discussion smoothly if their original plans fall apart. So they go with the flow.

    “That’s whole thing about the buying process,” he said. “The dealership gets you with the test drive, and if they can get you to the desk after the test drive and you are excited, you are in the process and it’s very hard to walk away.”

    Furthermore, at that point, both the salesperson and the buyer may be inclined to shift the focus of the sales discussion to the size of the payment -- rather than the interest rate. Ultimately, that could lead them to a term as long as 72 months.

    “What they should do is go for the rebate, and then go for the shortest possible term,” Dubis said. “Instead, they are going for the longest term and the lowest monthly payment.”

    With a six-year loan, the payment will likely end up lower than it would on a shorter-term 0% deal -- but there is a downside: Without a hefty down payment, the buyer will be “upside-down,” owing more than the vehicle is worth, for the entire term of the contract.

    It’s a nightmare scenario mirroring the housing crisis that brought the world financial system to its knees in 2008.

    The continuing debt load will never seem to go away, complicating the process of buying a new car down the road. Gary Pierce of Lending Tree Autos, an online clearinghouse for car loans, said consumers’ tendency to go along with the process shows up in his statistics, too. One out of 10 pre-approved Lending Tree deals doesn’t survive the negotiating process in the dealership; the buyer accepts a dealership offer instead.

    That’s a testament to the persuasive power of the salesperson and the environment. It’s also a sign that dealerships can be good sources of financing. They have long-standing relationships from a variety of lenders and can be especially helpful if a buyer has credit problems. But it may take a competing offer from a non-dealership source to lead a dealer to come up with the best possible counter-offer. “Hopefully, customers are getting a good deal in those cases, as much as we would like to be the one providing them with the loan,” Pierce said.

    Consumers don’t normally reach that point unless they have a pre-approved offer from a bank or credit union in hand as a bargaining chip, however.

    Since automakers usually offer a choice of a rebate or 0% financing, it may be best for consumers to take the rebate and use the financing they arranged themselves for the purchase. In this way, they shave thousands off the price of the vehicle and get a relatively low interest rate to boot.

    “Most of the time when people crunch the numbers, you are better off getting your financing at the credit union,” said David Adams, CEO of the Michigan Credit Union League. He said he has seen many credit union rates for new car loans at 4 or 5%.

    So is it “game over” if buyers fail to get financing in advance? Not necessarily, Adams said. They can still turn the situation to their advantage.

    While dealerships tend to steer consumers to an affiliated lender to make a higher commission on the loans, “virtually all dealerships have relationships with credit unions,” he said. “So you need to be smart enough to say, ‘What about a credit union option?’”

    Consumers won’t fare well if they blindly put their trust in advertised low-rate deals. While 0% offers can definitely save well-qualified buyers money, they basically exist for a different reason: Automakers need these deal sweeteners to sell enough cars to keep their factories humming.

    Nearly every automaker, from Suzuki to General Motors, is offering them these days. Their dealers don’t have it particularly easy. Amid the cutthroat competition, their profit from the actual sale of a new vehicle is razor-thin -- if it exists at all. And they make less money on the 0% financing deals than they would on their financing, Royce said.

    While dealers do need to make money, consumers need to be on their toes so they aren’t making an excessively generous contribution to their dealer’s revenue goals.

    Otherwise, they could end up paying a few thousand dollars more for their car than the next guy driving off the lot.

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    1 - 20 of 86 Comments
    govtraksam Sep 13, 2010 9:58 AM
    A FOOL AND HIS MONEY ARE SOON PARTED. Same people now buying cars they can't afford after buying homes they couldn't afford either. Gotta have that instant gratification and buy every toy that comes along. Unfortunately we all end up paying for this stupidity.
    Report This
    rubenslape Sep 10, 2010 3:05 PM
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    kidgonz07 Sep 07, 2010 10:49 PM
    Gary Hoffman...I am sorry but this article makes you sound like an Idiot!!!
    Report This
    cbstinc Sep 07, 2010 6:05 PM
    shmtnmusic. Who in the world is paying you that much interest? as fas as I know. bank's are not paying that much.
    Report This
    sdave7596 Sep 07, 2010 3:03 PM
    Not sure I agree with what the guy said about people who have the credit to get 0% generally don't need it? Come on, just because someone has great credit doesn't mean they are wealthy. No one should be penalized for good credit. Since when is being responsible frowned on?
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    helenekim Sep 07, 2010 1:56 PM
    this is in response to "drwds" 's comment. " If you cannot pay cash for a car, then you should not buy that car. Buy a cheap car you can afford and pay yourself a monthly "car payment." In 5 years you will have the cash to buy the type of car you thought you could afford with borrowed money." Sorry to disappoint you but if you buy an old car and try to pay yourself car payments, you will not have the money to buy a new car for cash in 5 years because you will have had to pay most of your car payments to repair your old car. I have watched several people, who thought they were being economical, do this and it just does not work. Either way you will be paying car payments. So, I would rather pay a car payment and drive a newer car that is reliable then to have an old car that I can not trust to get me where I am going and still have to pay to get it repaired every couple of months. Also, about the 0% financing. Watch out for the big deals that say that you can get the 0% financing OR a big rebate. If you can not get the rebate and have to pay more for the car then it really is not 0% financing is it. Some times I think that car dealers look at customers and think we have "stupid" written across our tee shirts.
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    jnver Sep 07, 2010 1:47 PM
    "Sales and F&I people are real people with families and are entitled to make money" TRUE, they are. The problem is they take advantage of less saavy customers and make MUCH MORE money on those who can least afford it. Hang out around a few car salesmen for a while and listen to them brag about a "HOMERUN DEAL" or how they "KNOCKED HIS HEAD OFF" and see how much sympathy you have for this "real person with a family". Next time you buy a car, walk into the F&I office and play dumb. See what kind of interest rate they offer you. 9 times out of 10 they will already have the finance contract printed out with the max rate the bank will allow, just waiting for your signature. Why? Because the difference between the rate you sign, and the "buy rate" is pure profit for the dealership, and that is how the F&I guy gets paid. He/she can cost you THOUSANDS and do it with a smile. But I guess that's OK because they have a family. And a coke habit.
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    trowgotn Sep 07, 2010 1:11 PM
    No one mentioned one of the things I had an issue with, $150.00 fee to process my application for a loan. I also see on the TV commercials when they offer these deals, "legal disclaimer" at the bottom of the screen with so many ways they are telling the consumer, we are planning on robbing you abutyour getting a car in the deal. It would be nive to be able to walk in and pay in cash for a car, but I like most cannot, I agree a 36 yr contract is best, anytime you pay less in intreset is always best. I never trade a car in, I'd rather give a car to a needy family than take what a dealership offers, and have on several occasions. We all have a great family member that can use a decent car to get to the store and doctors appointments, and doesn't want to bother anyone, I say give them the car you planned to use for trade.
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    mcskimmings Sep 07, 2010 12:49 PM
    bmcenroe--- Your EXACTLY right!!!! Koudos!!! This article is total B.S.. Unfortunately, I can't use it in a bird cage to catch droppings! "Estimating the average credit score needed to recieve 0% financing is 680-700" Are you kidding, sir??? Shut up and get a job!!!!! Dork!! You have NEVER needed that type of credit score to get 0%, nor will you ever need that type of credit score!!! 0% financing is the easiest thing to recieve!! The only people that are trying to NOT sell cars... Are AOL and these types of moroons!!
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    drwds Sep 07, 2010 12:42 PM
    If you cannot pay cash for a car, then you should not buy that car. Buy a cheap car you can afford and pay yourself a monthly "car payment." In 5 years you will have the cash to buy the type of car you thought you could afford with borrowed money.
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    drwds Sep 07, 2010 12:40 PM
    Zero percent or 2 grand off the sticker. I will go for the latter
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    bmcenroe Sep 07, 2010 12:27 PM
    Zero % is Zero %...PERIOD! The only thing that Keeps Mr Hoffman, and other "experts" like him employed, is to make the Dealer the bad guy. The only thing these fatheads do, is make it harder for you to buy a car, when you go into a dealership and act like an idiot. Here's a new twist, go to a reputable dealer (you can find out who they are on line) and be NICE to the employees. They actually are real people, with families, just like you. You will do better to remember that if they can't make a profit, they can't stay in business and give you the good service you demand. Better yet, go load up your grocery cart with $300 worhth of groceries and when the checkout person tells you it's $300 , offer them $250........ see how far that gets you.
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    lorianne2010 Sep 07, 2010 12:25 PM
    LOL Everyone is an expert.......
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    a1terrezza Sep 07, 2010 12:13 PM
    "Its a nightmare scenario mirroring the housing crisis that brought the world financial system to its knees in 2008." Gary are you kidding me.... 0% finiancing is going to bring down the economy... LOL stick to writing about issue you know about.
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    stephons33 Sep 07, 2010 12:02 PM
    This is the most stupid article I've ever read. Trying to convince people 0% is bad. You dumb ****. The trouble is that half you people that read this are eating it up because you're so ****ing stupid. This just goes to show how dumb people are. A manufacturer gives you 0% and you say to yourself "well, let me look at the downside." I swear if you got a free bar of gold when you bought a car most of you idiots would ask..."all right, but how big is the bar?" **** you're dumb.
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    djmake Sep 07, 2010 10:30 AM
    Looked into the zero percent. What this article doesn't cover.... they had a minimun payment for every thousand dollars financed. The ad said 5 years zero percent. I did the math, if you paid the minimum amount for the loan it would be paid off in 4 years, The payments ended up being very, very high.
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    whiteley9468 Sep 07, 2010 10:26 AM
    It is so funny to me when people say go to your bank for the money! You dont think the banks are making money when they loan it to you? They mark it up just like every other ************ OK for the bank to make money but the dealer isnt supposed to? I think people get confused about dealership financing. They hear horror stories of credit life,A&H,warranties and think all dealers are going to force these items on them. Yes, they will try to sell them to you but you dont have to buy them. Some of the products are viable products that can help you down the line.
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    rapath Sep 07, 2010 10:12 AM
    Always walk away when you get the bait and switch. Financing through the dealer is like swimming with sharks; it is much better to have financing from your bank or credit union before you even look at a dealer. They will give you a realistic view of your credit potential. Even better, save your nickles and buy with cash, ask the dealer to give you the 3,000 as a rebate. There is more money in financing cars than there is in selling cars; just look at GMAC.
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    whiteley9468 Sep 07, 2010 10:03 AM
    The person who qualifies for the 0.0% APR deserves the 0.0%. They have paid their bills and taken care of their credit. The folks who havent get the higher rate. The point was made that sometimes the 0% isnt the best deal. If there is a a big rebate and you can get a 4% rate, you may be better off with the 'bate. Car dealers, salespeople,F&I people are not crooks. They are there to make money for their families and there is nothing wrong with that. If you are uncomfortable with a deal then counter offer or walk away. In almost 30 years in the business I have never heard of a gun being pulled to may a customer sign.
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    mrmarvingc Sep 07, 2010 9:55 AM
    It is easy to walk away from a car deal in progress, esspecially if the dealer is giving you the run-around. I had a dealer tell me I didn't qualify for "special financing" because of my credit. I would have believed him, except for the fact that they had not gotten my SS# yet! (They are no longer in bussiness). Also,if they want to put me through a parade of different sales people, I walk. I had a sales person litterly rip a down payment check out of my hand (the paperwork had not been signed yet) - I took it back from him and went somewhere else. Remember there is always another dealership willing to treat you better.
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    AOL Autos takes a closer look at the 0% financing offer and discovers that it can be a sham.


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