There are multiple financing methods to explore when you are in the market for a new vehicle but the most popular ones available are 100 percent and zero percent loans. Though they seem nominally related, they are quite different and both have distinct advantages and disadvantages.
Take a look at this guide and see which option best suits your needs.
A 100 percent financing car loan is one that allows you to borrow the full price of the vehicle, requiring no down payment from you. If a car has a sticker price of $20,000, a 100 percent loan would get you the full amount, allowing you to buy the car without any money from your end. Of the car loan options available to you, 100 percent financing loans are among the most attractive.
The most obvious advantage of a 100 percent financing car loan is that you don’t need to put any money down on the car. If you are approved, you simply pick out the car you can afford with the money loaned to you and drive off. Another advantage—if you have the money for a down payment—is that you can save it to make car payments or for later repair and transportation costs. Still another pro of 100 percent financing is that it indicates that your credit score is favorable. Only a borrower with good credit will be approved for a loan that demands nothing as a down payment.
No money down loans can really come to the rescue especially if you are in a bind and cannot raise the money for a down payment. Check the auto loan terms, though, before you ever agree to any such loan. Your monthly car loan payments could be quite high due to the higher interest rate and longer repayment schedule.
There are several disadvantages. For starters, you might have to put money down as a requirement, regardless of the claim. Look at the contract, it may demand upfront payment of certain fees or closing costs which may go entirely to the dealership or lender. If that is the case, not only will you have to pay something upfront, but none of it may go towards the principal of your loan. Another con is the interest rate. Even with good credit, if you agree to the terms of a 100 percent loan, the interest rate will be proportionately higher. Since you’re not putting down any funds that would normally act as a security on the loan, you suddenly become a higher risk. You might also get sacked with a longer-than-normal repayment period meaning you could be stuck making high-interest payments for five years or longer.
The zero percent offer is usually either/or—either a rebate or the zero financing, but not both.
Zero percent auto loans are usually reserved for buyers with very good to excellent credit, ranging from a 700 to 750 FICO score. The average American has a score closer to 678 through 690. Those few points don’t seem like much but they can be just enough to disqualify many from acquiring 0 auto loans.
There is an upside to 0% auto loans. Every penny of the payment goes to principal and the shorter 36-month loan means the car is paid off at least two years earlier than a 60-month low rate auto loan.
Zero percent auto loans are usually for a shorter term—often 36 months—meaning higher payments. A 60-month low-rate car loan equals lower payments. Consider the difference on a $20,000 car. A 0 percent auto loan for 36 months means a payment of $556. If the offered rebate was $3,000 and the low interest loan was for 60 months at 7 percent, the payment on the financed $17,000 would be $337, over $200 less a month.
The interest over the term of the loan would eventually eat up the amount of the rebate and bring the total amount paid to almost the same but if lower monthly payments are the object, the low rate loan is the way to go. Some zero percent loan agreements state that if a payment is late, the rate increases.
The car shopper with an average credit score needs to shop around for the best car loan lender and the lowest APR. It is wise to find out the current car loan interest rate, pair it with the rebate and compare it to zero and 100 percent auto loans. Being informed can take the unpleasant surprises out of car buying and smooth the entire process.