0% Auto Financing (Really)?

0 % Auto Financing – Smoke and Mirrors

Human nature, getting something for nothing keeps this old conspiracy alive and believable.  0% auto financing contracts originated in the west when new car purchases began to decline.  It was convincing because it was the  automobile manufacturers making the offer through their financial institutions  Ford Credit, GMAC Financing, Chrysler Credit, Toyota Credit, etc. Customers knew the new car market was soft so presumed the offer was genuine; but there is no such thing as 0% auto financing, it’s all smoke and mirrors.

Western manufacturers did two things to pull this scheme off.  Publically rebates were suspended; privately various end of year bonuses the manufacturer owed the dealers (ie. dealer holdback) were diverted to the financial institutions.  These yearend bonuses enabled dealers to sell cars cheaper, but once it was removed to fund the 0% scheme the final sale price lost a lot if not all negotiating margins.  End result the consumer paid 0% interest on the contract but paid a onetime interest charge in the price of the car.

Israel’s 0% Auto Financing

Today Israeli dealers and local banks are emulating the same scheme.  If you have good credit you may be offered a no interest loan, but STOP think it through.   If you follow the money you have to ask, what do local banks gain by offering money for nothing? The answer NOTHING therefore they do not lend money at no cost.  Loans and fees are the only way banks are allowed to make profits; they are charging someone for that money. 

Where Does the Money Come From?

Is the car dealer paying the cost?  Given that a typical loan of 120,000 NIS in the first 3 years will cost 12,699 NIS in interest, ask the obvious question, can the dealer afford that  cost?  Of course not - so they pass it on to you in the form of inflated sales pricing, and it’s not hard to do especially in 36 month balloon contracts.

 

If you knew that you were paying the cost regardless of what the loan papers indicate  you need to know the downside?  It may be that you will not experience a downside except much of your negotiating power is lost, but if something happens in the next three years that causes you to terminate the contract for any reason you will take a massive financial hit, here is why.

On a conventional loan where the interest that you are paying is clearly outlined in the contract, you will pay this interest charge as you go, one month at a time.  This is the only way a person should pay the interest “as you go”, for we do not know what tomorrow will bring.

The 0% contract is much different.  All the interest that will be earned over the term of the contract , typically 36 months, will be added to the cost of the car; it becomes as much a piece of the car as the bumpers are piece of the car.  If for any reason your contract with the bank is terminated (vehicle theft, total loss accident, or your need to sell for any reason) before the 36th payment has been made you will be forced to pay the balance which includes the interest cost that were not earned by the bank.  That’s the bad news.

Now For The Really Bad News

If the contract termination is due to theft or accident and the car is written off, the insurance company will pay the bank the current Levi Yitzak value of the car, not what you owe, which will be substantially more.  Had you taken the traditional financing contract with the interest clearly stated and earned as it is used, the interest earnings would cease the day the insurance company paid the bank for your car that was lost, not so on a 0% loan contract.

To be honest all cars within the first 2 years of purchase will have a book value less than the loan balance, but when you have a 0% interest loan the gap will be much, much more guaranteed.

Want to look at real financing options go to Auto Financing in Israel  save yourself and your family from these old yet attractive schemes.  Or you can email me directly at hezy@ianglo-auto-association.com 

Something for nothing? -  Never.

0% financing? - It’s all Smoke and Mirrors.