Zero Percent Financing - Something For Nothing?

By EILEEN ALT POWELL AP Business Writer

NEW YORK September 19,2002 This feature report by Eileen Alt Powell writing for the AP discusses the reality of Special auto manufacturer incentives.

"Zero percent financing is back at the nation's Ford and GM dealers. It has proved to be such an effective marketing technique that it's also being adopted by furniture and electronics retailers as well as some credit card companies.

At last, something for nothing?

Experts caution that like many things, if it sounds too good to be true, it probably is. A zero percent finance agreement — essentially an interest-free loan — is not necessarily the best deal for consumers, they say.

``It's as close as you can get to a legalized 'bait and switch' scam,'' complained Remar Sutton, president of the Consumer Task Force for Automotive Issues that was launched with consumer crusader Ralph Nader a decade ago. ``They draw you in to look. But the fact is, most people don't get the zero rate.''

Sutton is critical because, he said, only buyers with the very best credit actually qualify for the no-interest loans.

``Most are told their credit (rating) isn't good enough,'' he said. ``Or they find that the deals are only for 36-month loans, meaning that they can't possibly make the monthly payments.''

These buyers might end up with loans — often from the auto company's or furniture dealer's own financing arm — that carry interest rates higher than the borrower would get at a credit union or bank.

CNW Marketing Research of Bandon, Ore., found that just 9 percent of car and truck buyers drawn in by zero percent financing promotions actually ended up getting the deal, said company president Art Spinella.

Those that do can save hundreds of dollars in interest payments, he points out. But even these buyers don't necessarily make out like bandits because they often end up paying a higher price for the vehicle.

``We find that very few people who get zero percent (financing) actually haggle over price,'' Spinella said. ``While 70 percent of normal buyers haggle, zero percent finance people assume they're getting the very best deal possible and only 18 percent of them haggle.''

Some of the caveats about zero percent financing are disclosed at the bottom of ads or the back of circulars — often in the small print that consumers don't read. A recent study by Consumer Reports found that some of the sales contracts contain penalties, or what it terms ``small print Gotchas.''

One computer company, for example, hit buyers with interest charges of 14.9 percent or more if they failed to pay off their zero percent loans in full in the specified six-month period, Consumer Reports found. The interest was retroactive to the date of purchase.

It also found that the no-interest offers at some retailers applied only to specified brands and that they expired on different dates — after a year on a washing machine, for example, but after just six months for a piece of fine jewelry.

Some of the credit card offers are difficult to evaluate. Promotional material often doesn't say how long the introductory zero percent rate applies or what rate will be charged after that — or if the consumer misses a monthly payment. One bank currently offering a no-interest deal on debt transferred to its credit cards says, in fine print, that ``this offer is subject to fees'' of up to $50.

When it comes to cars and trucks, a big problem with zero financing offers is that they sound so good that would-be buyers don't bother to weigh other options, such as taking a rebate instead.

Edmunds.com, a Santa Monica, Calif., company that publishes car and truck buying guides, recently introduced a new calculator at its Web site at www.edmunds.com that lets buyers compare no-interest and rebate offers.

``It allows consumers to walk in empowered to negotiate the best deal,'' said Bob Kurilko, vice president of product development and marketing.

That's important, he said, because auto sales people ``like to combine things in a package — they lock in on what seems to be important to the consumer, make a concession on that point, then make their money on the other things.''

Kurilko said consumers should deal with each component separately: First, negotiate the price of the car. Then negotiate what the dealer will give for the trade-in vehicle. Only then should the would-be buyer ask for the dealer's best financing offer.

A comparison of zero interest loans and interest-bearing auto loans calculated by Sutton can be found at the StreetWise consumer education program at the Digital Federal Credit Union site, www.dcu.org.