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Promotional signage at Erin Mills Auto Super Centre in Toronto, August 21/08. (Tibor Kolley/The Globe and Mail)
Promotional signage at Erin Mills Auto Super Centre in Toronto, August 21/08. (Tibor Kolley/The Globe and Mail)

Guest Column

Zero per cent car financing can end up costing you money Add to ...

There is no such thing as a free lunch, but offers of 0 per cent and outrageously low-interest vehicle financing seem to contradict that adage.

Here’s the thing: “Interest-free” new-car loans can actually end up costing you more than if you had paid a higher interest rate.

Buying a new car is a significant financial decision. The choices you make at a dealership can easily add up to hundreds or thousands of dollars in savings. The key to maximizing your savings is to understand how new vehicle incentives work.

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Cash rebate versus low finance rate

Auto makers often advertise thousands of dollars in savings or price reductions to entice buyers. These cash rebates are applied as direct discounts off the vehicle purchase price and they are generally in addition to discounts that can be negotiated with dealerships.

The catch is that these cash rebates are typically only available to buyers who purchase in cash and do not require financing (referred to as a “non-stackable” rebate).

The 2014 Nissan Murano SV, for example, features a $7,000 non-stackable cash rebate this month. Nissan is also offering 0-per-cent interest financing for up to 72 months on all Murano models. You must choose either the $7,000 rebate or 0 per cent financing. You can’t have both.

In some cases, a smaller portion of the cash rebate may be “stackable” and available for those who choose to finance at the auto maker’s discounted rates. But the reality is that free money does not exist, and the cost of borrowing ultimately has to be paid by someone – even if it is in the form of a forgone cash rebate.

Not all cash rebates and rates are easily found on auto-maker websites. Some websites, such as AutoFocus.ca, publish all current auto maker incentives for easy comparison.

When 0 per cent is worse

Zero-per-cent financing sounds attractive, but there are instances when you can actually save more by financing at a higher rate.

Non-stackable cash rebates cannot be combined with discounted financing rates from the auto maker, but you can get financing elsewhere, including an auto loan from a bank or a personal line of credit. Most dealerships can arrange bank financing for you.

If you financed the Murano SV at 0-per-cent interest for 48 months and no cash rebate, your payments would be $929 a month including taxes and mandatory fees, with a total purchase price of $44,576, assuming no additional dealer discount.

If you financed the same Murano at the standard Bank of Montreal auto loan interest rate of 3.99 per cent for 48 months, and took advantage of the $7,000 non-stackable cash rebate, your payment would only be $828 per month including taxes, for a total purchase price of $36,666.

Saving an extra $100 a month can be that easy. This auto loan calculator will show that the total extra interest paid at 3.99 per cent for 48 months is slightly more than $3,000, but it is more than compensated for by the $7,000 cash rebate that is otherwise not available with 0-per-cent financing.

Next time you buy a new car, do the math to make sure you’re getting a great deal.

Andrew Tai is CEO of Unhaggle, which helps consumers find new car deals by providing access to data on what others paid for the same vehicle, current incentives, invoice prices, and more. Follow him on Twitter @Unhaggle.

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