As interest rates inch up, it’s less likely consumers will continue to see the once plentiful zero-percent financing offers when shopping for a new vehicle.
Bloomberg recently reported automakers are starting to abandon zero-percent offers as their own borrowing costs increase.
But analysts say there’s a silver lining to fewer zero-percent offers — they weren’t the best deal for most consumers anyway.
Autotrader Executive Analyst Michelle Krebs said she recommends car buyers take the cash rebate over zero-percent financing.
"In a lot of situations, typically the majority, the standard (finance) rate along with the (cash off) incentive is a better deal," said Brad Korner, general manager of Cox Automotive Rates and Incentives.
For example, Korner points to recent offers on a 2018 Ford Escape SE with front-wheel drive priced at $26,827.68. The compact SUV had zero-percent financing available through Ford Credit, or if financing through an outside credit union or bank, a $3,000 rebate, he said.
With zero-percent financing, the monthly payment was $372.61, while a buyer who landed an annual percentage rate of 1.75 percent from an outside lender and took the $3,000 rebate had a monthly payment of $348.86, Korner said.
"You saved about … $23 per month over the term of the contract, 72 months," he said. Or put another way, the savings totals some $1,700.
Korner says not many buyers take zero-percent offers. First, customers need to have top-tier credit scores, the vehicle they want to buy has to be eligible for the offer and the dealership has to tell consumers about the deal, he said.
Zero-Percent Offers Decline
And the number of buyers who received zero-percent auto financing has been on the decline for two years, according to data from Cox Automotive’s Dealertrack Inc., which provides technology to dealerships.
Last year, 4.6 percent of buyers in deals done through a Dealertrack system took zero-percent offers, down from 7.1 percent in 2015 and 5.8 percent in 2016.
"Zero percent in most cases was never designed to be a great option for the consumer," Korner said. "It’s almost entirely to drive foot traffic."
Korner said the number of zero-percent financing offers has declined since last summer and will continue to decline due to the increased cost of borrowing money.
The Federal Reserve raised interest rates in March (the sixth increase since December 2015) and is poised to push through more increases this year. Banks, credit unions and automaker finance companies are following suit, increasing interest rates tied to auto loans.
While zero-percent offers are declining, in April they were still being used nationally by automakers such as Hyundai, Kia, Nissan and Mazda on a mix of 2018 and 2017 models, according to Cox Automotive data.
Those deals may still entice some customers. An April 2018 Cox Automotive Leasing and Incentive Study found one-third of consumers aren’t familiar with incentives on vehicles they are interested in.
But the study also found that factory rebates/cash back were the top type of incentive consumers overall prefer and about twice the percentage of special finance rates or extended warranties. And the median rebate found to motivate shoppers to buy a vehicle within a week was $2,500, according to the study.
What You Should Do Before Heading to the Dealership
Korner recommends car shoppers scour manufacturer and dealership websites for current offers, incentives and lease specials on vehicles they are interested in before heading to the showroom.
Some buyers, such as those who recently graduated from college, who are in the military or even who own another manufacturer’s vehicle, may qualify for additional cash-back offers, Korner said.
He also recommends prospective buyers crunch financing and payments ahead of a dealership visit, including paying cash and what interest rates and monthly payments they could get at with their bank or credit union.
"Once you’re there (at the dealership), it’s really hard. They throw the numbers at you whether it’s intentional or unintentional, and it all becomes a blur," Korner said. "And it gets very difficult to understand. Most people, I would think, would want to figure out this level of financing before they even walk in the door."