0% auto loan: the best financing solution? 

Given the low level of interest rates, buying a new car on credit may be advantageous. But low rates also mean that the savings you leave in your savings account no longer generate much in the way of returns. The choice between financing through a loan or by spending your own capital will therefore depend on your financial situation and your desires.

The classic auto loan is highly popular because of its attractive rates. The loan is justified by the purchase of a vehicle, which constitutes the guarantee for the bank. The bank can therefore offer a more attractive rate than for a personal loan without surety. Once your application has been accepted (including proof of the vehicle purchase), you will receive the funds that you will then have to reimburse through fixed monthly instalments throughout the entire duration of the loan (which includes interest and principal).

Tip: to promote sustainable transport, the latest tax reforms grant a €5,000 tax deduction to buyers of cars that emit no CO2 (i.e. fully electric or hydrogen fuel cell vehicles).

Certain car dealers also propose auto loans. They are reputed for offering lower rates than the banks—sometimes even 0% rates. But is this really the best solution?

Certain dealers propose very low rates to finance the purchase of your new car, sometimes as low as 0%. This payment solution may seem attractive at first glance, given that you will only be reimbursing the capital, with no supplementary interest to pay. But is this really the case? Don’t forget that borrowing money also costs money, even if the financing deal appears to be “free”. Let us look at the “hidden” costs which may be associated with a 0% loan.

• First, there is no such thing as free credit. The interest that you will not be paying on this loan will be covered by the dealer as a goodwill gesture.
• Given that the dealer covers the interest charges, he will often limit the duration of the time over which the credit can be contracted, in order to limit the cost. Your monthly instalments may therefore be very high over a shorter period of time.
• The goodwill gesture concerning the loan rate also means that the dealer will not be offering you any further perks regarding the price of the car:
  • He will offer no real rebates on the price of the vehicle. And yet, discounts you receive when buying a new car can easily outweigh the interest payments that you save on a short-term auto loan. Is it really worth giving that up?
  • If you want to trade in your old car with the dealer to help finance the new one, make sure its value is not underestimated. That's another strategy used to offset the advantage granted on the loan. Again, always check to see if what you're saving on interest is enough to offset your losses on trading in your old car.
• Lastly, in order to grant you a 0% loan, the dealer will ask for a heavy down-payment. You will therefore need to have this sum available and accept to do without it, in order to take advantage of this type of loan.

An auto loan at 1.55% over 36 months represents a total credit cost of €597. So if you opt for the dealer's 0% loan, your gain will be €597. You will probably not be granted any further discounts on the vehicle.

Discounts granted by dealers generally range between 3% and 19% of the purchase price. On €25,000, this represents at least €750 (3%) and at most €4,750 (19%). In all cases, the discount will save you more than if you opt for the 0% loan.

Contrary to popular belief, a 0% auto loan is not cost-free. Do not be deceived by appearances. Calculate your potential gains and opportunity losses carefully before choosing your financing method.

12/2021