Each year, car makers set their goals ever higher to sell the millions of cars they produce. This can be good news for us, the consumers. It means there will be keen price competition and attractive deals to get us to buy, buy, buy. One tactic manufacturers use to move the metal is an incredibly low interest rate. It can certainly spark our interest, and it could even be a good deal...maybe.
Check the Fine Print
We've all seen the 'Super-Low' interest rate when shopping for that new car. Typically, these ridiculously low rates mean you'll be borrowing the money right from the manufacturer. And like any sound business, they are out to make money. If they're lending money at 3.9%, 2.9%, .9%, or even 0%, they're losing out on other higher interest investment opportunities. Since they're running a special promotion to sell cars they may give you the low rate, but for the shortest time period possible. Your low interest rate could be for a term as little as 12 months. If you're buying a car worth, say, $20,000, your monthly car payment would be over $1600 a month even with 0% interest for 12 months. Of course, your car would be paid off in a year. Wouldn't that be great! Unfortunately, for most car buyers, a year - or two - or three - is too little time to pay off a car when there are other household bills to consider as well.
Keep in mind that not all super-low rate programs mean a short-term loan. In fact, some programs of late have been known to extend fantastic rates with terms of up to five years. Before you sign the dotted line, however, make sure you've checked the fine print on any loan you're considering.
The Dealers Secret Weapon
The dealer may use the super low interest rate as an excuse not to bargain on the purchase price of the vehicle. Besides, they may reason, with an interest rate that low you're already going to save a bunch of money (no matter what the purchase price). Think again. In the negotiating process, the finance rate should not be a factor. Your goal is to get the lowest reasonable price for the new car, and the highest reasonable trade-in value for your current car if you're trading. The money saved with a super low finance rate could go down the drain if the car was overpriced in the first place.
The Real World Alternative
If you can afford a higher than average car payment, or have a large down payment or trade in value on your car, this deal may well be for you. But before you possibly wind up with a higher car payment than you can comfortably afford, it would be smart to consult your credit union. They specialize in helping you get the best deal in financing, taking into effect your other household expenses and financial commitments. Your loan officer can help you run some numbers for a credit union loan vs. a manufacturer loan so you can compare monthly payments. They can also help you determine a fair value for the car you're purchasing and trading. And they can get you a loan with a longer repayment period and lower payments that may fit better with your overall budget.