Many car buyers have heard of the zero percent auto loans many financing companies offer. Car loan interest rate levels are at an all-time low as the economy has slowed in 2009, yet financing companies struggle to get approvable customers to walk through their doors. Understanding the stipulations of zero percent auto loans is not a simple task but this guide will show you the basics.
A zero percent auto loan no APR or zero points on the loan, meaning the client does not pay a cent in interest during the course of the loan. Normally, these auto loans have very restrictive agreements, shorter term periods and higher down payment requirements. Auto financing companies are not keen on offering loans on which they stand to make little or no money in interest. Because this agreement provides them no profit, the only benefit to them will be the quick influx of cash from your premium payments (which they can then turn around and use to cover another customer’s loan).
The first factor is debt to income ratio. Having a great deal of income is great, but won’t help you in the least if your debt is of the same size. Owing $20,000 is not a major issue if your income is over a $100,000. If your income is closer to $50,000, this potentially poses a much greater problem, as these companies look at the relative status of debt and income. By focusing on improving this proportion, a buyer has a greater likelihood of achieving the coveted zero percent financing. Not having any debt can also work against you; lacking a credit history is detrimental to approval because lenders have no basis to determine your reliability.
Collateral has long been a major bargaining chip in the loan industry. Before banking regulations were created, collateral was often the only way to obtain a loan. A buyer with an expensive home has leverage for a much better interest rate by using it as collateral. Companies love knowing their sales are secure, as this guarantees payment. Failure to pay, however, results in possible seizure of a much more expensive piece of property. Extending zero percent financing is an ideal option when clients have large capital holdings.
To make a quick decision, the most often checked factor is credit score and some dealers base their decision entirely upon this magic number. Some car dealers actually post their credit score requirement for zero percent financing Credit scores are determined by undisclosed mathematical formulas. Though not publicized, what is known is that debt-to-income ratio is one of the determining factors in these formulas, as well as payment history and length of credit history.
In many cases, if borrowers have enough of a down payment, they can persuade auto loan lenders to offer a very reasonable repayment period and low-closing costs. Zero percent financing can be beneficial if you have excellent credit and you want to pay off your vehicle in a few years. However, for the average consumer, it would be prudent to explore other financing options.