Zero percent financing and cash-back rebate offers are as much a part of auto sales as gleaming showrooms and that new-car smell. The options also pose a dilemma for shoppers: Which one is better for their pocketbooks? • While the words "zero percent financing" can have a powerful tug when it comes to buying a new car, analysts say it is not always the better choice. A buyer may be better off choosing the cash-back rebate in cases where the loan has to be repaid in 24 to 36 months. But zero percent financing that lasts five years or longer can be very attractive.
"It offers consumers interest-free financing, which is a lot of incentive. . . . They can save money. Normally the rebate is $1,000, $1,500 or $2,000, but the finance interest incentive (over five years) averages $3,500 to $5,000," said Obaid Nabizada, a finance manager at Hayward (Calif.) Nissan.
Of course, when it comes to buyers who pay up front with cash or a personal check, then a cash-back rebate is the only option, he said.
Zero percent financing requires manufacturer-backed financing offered through car dealerships. A good credit score — generally 700 or above — is needed, which means most buyers who seek zero percent financing do not get it, said Liz Opsitnik, editor of autoloandaily.com.
Zero percent interest loans typically are offered for 24 to 36 months. However, a 60-month or longer term has recently become more available.
Buyers who opt for zero percent over five years can really benefit, Opsitnik said.
"It keeps their payments low. It's free money you can use for borrowing," she said. "It stretches your payments over five years. You could take that extra money and put it toward a credit card balance or put it in savings. That's the best deal around."
Tthe shorter repayment window of 24 to 36 months can make for some pretty high monthly payments, even though no interest is being charged.
Case in point: Say a $24,000 vehicle offered zero percent financing over 36 months or a cash-back rebate of $3,000. If a buyer took the zero percent financing, he would have a monthly payment of $666.66.
That payment might be difficult for some consumers to manage, even though it saves them from paying interest on the loan, said Ethan Ewing, president of San Mateo, Calif.-based bills.com, a personal finance website.
If that buyer took the $3,000 rebate instead, applied it toward a down payment, then took out an auto loan from a bank or credit union with a 6 percent interest rate over 36 months, he would come out with a better deal. Monthly payments would then be $638.86 based on the lower price of $21,000 paid for the vehicle.
(The example does not include taxes, delivery, registration, title and license fees, or a trade-in vehicle discount.)
The picture starts to get brighter when the repayment term for zero percent financing gets longer.
If that same $24,000 vehicle could be purchased with zero percent financing over 60 months, the monthly payment would be $400.
Compare that with a 60-month loan with 6 percent interest rate, which would result in a monthly payment of $464, or $3,840 more over the course of the loan.
If your credit score is not good enough for zero percent financing, do not automatically go for the cash-back rebate, Opsitnik said.
In some cases, a car buyer would be better off asking for a low interest-rate financing deal offered by the manufacturers.
"You may qualify for 2 percent financing, so it still might be a better deal than cash back," she said.