While low-interest finance is tempting, it often doesn’t add up to a better deal.
No-interest or low-interest car loans are the latest salvo from car manufacturers desperate for sales. When a car dealer offers you money for nothing, there must be a catch, right? Well, yes and no.
The good news is that special advertised rates of 0 per cent to 1.9 per cent interest from car makers such as Holden, Ford, Nissan, Toyota and Kia do deliver on their promise. The catch is, you may end up paying more for your new car than you would if you had shopped around and paid cash, or even if you had taken out a personal loan.
Interest rates for new-car loans are typically 2 per cent or more higher than mortgage interest rates.
According to loan-comparison site Canstar, rates on standard car loans range from 7.99 per cent to 10.75 per cent, compared with the average standard variable mortgage rate of 6.19 per cent. This is because cars depreciate quickly over the first 18 months so lenders are unable to recoup the full value of their loan if the borrower defaults.
Recent research by Canstar found that 2011 models of the Holden Commodore and Ford Falcon had already depreciated by 60 per cent and 55 per cent.
People who lease a vehicle for business can claim depreciation against their taxable income, but personal buyers foot the bill themselves.
If dealers are not charging interest on their finance packages, they need to make up the difference in other ways. For starters, the price of a vehicle with a special low- or no-interest deal is often non-negotiable. Buyers who are prepared to shop around may be able to negotiate a cheaper price elsewhere.
“Typically, the new-car price is higher than you could get elsewhere and the trade-in value on your old vehicle is lower,” a finance broker with Willow & Oak, Adam Smyth, says.
Smyth cites the recent example of a 0.5 per cent finance deal on a new car valued at $47,500. After shopping around, the buyer was able to negotiate a price of $40,700 for the same model car with a different dealer. Even after taking out a standard car loan, the buyer was ahead at the end of the loan term.
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