How Can a 0% Car Loan Exist?

Posted by on December 20, 2018 @10:48:33 EDT

Usually when a lender helps you to buy a car or anything else, interest is charged as a way to generate a profit for the bank. This is why the existence of 0 percent car loans in Toronto can be so confusing.

It’s natural to assume something which seems too good to be true is actually a scam. We explain what’s behind the motivation for lending money without making a profit off the transaction, and who’s funding it.

You’ll also learn about a catch you probably don’t realize exists with a car loan that doesn’t include interest.

No Interest

Pretty much everyone knows there are some car loans in Toronto which supposedly involve no interest. You see the advertisements all the time online, while watching TV, on signs, and more. But, the promise of not having to pay anything extra to borrow all that money seems a little too good to be true.

If you’ve ever had a car loan in the past, you know that a good portion of what you’re paying goes toward interest. This is especially true in the early part of the loan. That fact makes the prospect of not paying any interest when borrowing money for a car tempting.

No interest for a car loan is a tempting thing.

Being skeptical of this kind of an arrangement is not only natural, it means you are thinking actively about what’s going on. Since car loans are big commitments, it’s always wise to do thorough research before signing on the line.

Unbelievable Deal

The way lenders make money off any loan is to charge interest, otherwise you’re just paying back the money you borrowed and that’s it.

To help you understand just what an unbelievable deal a 0 percent interest loan is, you first need a solid understanding of how car loans work.

Car Loans Explained

When people get cars loans in Toronto, they’re getting money from a bank, credit union, or other financial institution to immediately pay for the purchase price of the car. Most people get that.

The interest a lender charges is what generates income for the bank. A higher interest rate means the lender makes more from the same loan amount with a lower interest rate.

It doesn’t take much thought to realize that 0 percent interest on car loans in Toronto translate into the lender making nothing. Instead, it’s like you paid cash for the car, only you get to fork over the money over the period of several months or years.

Why Do They Exist?

Naturally, you’re probably wondering what’s the catch. After all, why would any bank lend money and not make anything? Aren’t they a business just like the grocery store? That would be like paying a store what they paid for every item, eliminating all profits.

A business won’t be around very long if it doesn’t make any money. No bank in its right mind would offer such a deal, because it doesn’t have anything to gain from it.

The answer is banks don’t offer these kinds of incredible deals. Instead, they’re backed by the automaker. Notice 0 percent car loans in Toronto are only available for new cars, not used models. Automakers get their profits from selling the cars, so providing extra incentives for people to get a car, truck, or SUV when they might otherwise pass on the opportunity really helps the business.

Instead of getting all the money for the sale of the car up front, like what automakers earn when a bank finances the purchase of a new vehicle, they get profits in installments. It’s a great way to boost sales, but automakers obviously can’t extend this kind of a deal to just anyone.

Stretching Your Money

At 0 percent interest, such cars loans for Toronto shoppers essentially means they can afford a more expensive vehicle.

Everyone has a certain amount they can reasonably dedicate to a car payment each month. Lenders will even ask certain details about your regular expenses and make their own calculations about how much they feel comfortable extending in credit for a car purchase.

The unfortunate fact for anyone who doesn’t have a credit history or has blemishes which appear on theirs is they’re usually facing a fairly high interest rate. Since part of your monthly payment is the interest paid on the loan, the higher rate actually diminishes how expensive of a purchase price those people can afford.

On the flip side, if you qualify for 0 percent interest, you can actually get a more expensive option than even if you qualified for a loan with a relatively small interest rate. It’s kind of like how leasing allows you to drive something nicer, but you get to keep the vehicle once the loan is paid off.

Some people might use such an opportunity to purchase a dream car. Instead of looking at a fairly nice mainstream model, you might find that a luxury or performance model is now within reach. That’s an exciting proposition, but you need to keep your wits about you, despite the understandable excitement.

While a 0% interest loan could mean getting your dream car, you might want to be realistic.

Think long and hard about the other costs associated with owning a specific car model. For example, carrying costs can run the gamut. Some cars consume fuel voraciously and their tanks are quite large, meaning you often are at the pumps spending a good amount of money.

Insurance costs are often higher for more expensive cars, like luxury models. The same thing goes for performance vehicles. For you to know for sure how your insurance rate would be affected by owning a specific car, you’ll need to contact your insurance broker. While you’re at it, have two or three options on hand so you can get quotes on them all.

Don’t forget about maintenance and repairs. You don’t just put fuel in a car, drive it, and that’s it, at least if you want it to work correctly. Some cars require constant maintenance, which can cost a fair amount of money. You might find they break more often as well, with the cost of making repairs quite steep.

For these and other reasons, using a 0 percent interest loan to get an expensive car can backfire on you financially. As always, proceed with caution, because vehicle ownership is a pretty big commitment.

The Catch

There is a catch with 0 percent car loans in Toronto or anywhere else. It’s not the sort of thing every single car shopper can enjoy, because automakers only offer it to a select group.

That might sound like discrimination, but automakers need to protect themselves and their profits. Only people with excellent credit and verified income at a certain level can qualify for 0 percent interest on a loan. The idea is that such shoppers are low risks, so if anyone can and will pay the money back, it’s them.

Usually, you also need a long and solid credit history to get in on this amazing deal. That does squeeze out younger shoppers, or people who in the past suffered financial disruptions or weren’t as responsible as they are today. It’s a legal thing to do, as long automakers apply the same standards to everyone.

A small percentage of shoppers can actually qualify for these loans.

Getting Another Deal

Why do automakers and dealers advertise 0 percent car loans in Toronto so much?

It’s pretty obvious that such a thing generates considerable interest. Even if you’re not really looking to get a new car at the moment, the prospect of qualifying for a loan that doesn’t include interest is pretty tempting.

Once enough people have seen the advertisements, a steady flow of shoppers visit the dealership. They eagerly apply for the amazing promotion, with most of them finding out they simply don’t qualify. From there, the dealer will then present a traditional loan with some type of interest rate to the other shoppers.

You might still get a good deal on a car loan

The allure of a 0 percent car loan can draw in big crowds to a dealership. With the majority of people not qualifying for that promotion, even if a small percentage decide what they’re offered is something they can handle, the dealer and the automaker make even more of a profit.

So, 0 percent interest on car loans in Toronto can really help pump up business. A dealership might advertise this when sales are slow, or if there’s a backlog of cars which they need to sell in a hurry. Whatever the reason, these promotions are only around sporadically.

What To Do?

If you’re not wanting to waste time and really want to find out if an advertised 0 percent interest on car loans for Toronto shoppers is real, visit the dealership.

First things first, verify the rate is still available and that the promotion hasn’t ended. If it’s come and gone, you can choose to leave right then and there. Sales associates are trained to keep you at the lot and looking at cars, hopefully so you fall in love with an option and decide you must get it right then. While technically that’s not a bait and switch, it does mean you showed up for one thing and were sold on something else.

Let’s say the 0 percent car loan promotion is still going on, that doesn’t mean you buy a car without testing it out first. Even if you really like it, don’t indicate to the sales associate that you’re at all emotionally attached, otherwise you lose leverage. You must be prepared to walk away if negotiations don’t go the way you want.

Even with 0 percent interest on the table, you should still negotiate for the best purchase price possible on a car. Automakers and dealers might pump the price up some before running such a promotion as a way to pad their profit margins a little more.

In the event you don’t qualify for 0 percent interest on a car loan, that shouldn’t automatically mean you leave right then and there. Hear the dealer out on what kinds of options are available to you at that time, because they might still be solid deals. You don’t need to commit to anything right away, but definitely get any offers in writing.

It’s always a good idea to think over a car purchase before committing to it. With a written offer in hand, you can shop around for an even better deal, and then you can return to the dealership to go through with the transaction. Depending on your situation, you might even decide to wait on buying a car, maybe for an improvement in your finances or the release of a new sales promotion.

Remember you’re in charge. Nobody else decides if you commit to a car loan or not. It’s your finances and your future.

While they sound like some sort of a scam, 0 percent car loans in Toronto are a real thing. They capture plenty of attention from car shoppers and even people who aren’t really considering buying a new vehicle, thanks to the excellent deal.

The reality is most people won’t qualify for such an amazing deal on a car loan. Once the dealership has your information, they can try to convince you that a traditional loan is still something you want to take on, hoping to get a fair amount of sales that way.

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