Edmunds: 0% loans are a smart way to get out of a bad loan

By RONALD MONTOYA of Edmunds
Posted 6/3/20

To spur car sales amid the coronavirus pandemic, nearly every automaker has introduced 0% financing. Getting a 0% car loan can be a smart way to finance a new car.

Edmunds data shows that 26% of …

To Our Valued Readers –

Visitors to our website will be limited to five stories per month unless they opt to subscribe.

For $5.99, less than 20 cents a day, subscribers will receive unlimited access to the website, including access to our Daily Independent e-edition, which features Arizona-specific journalism and items you can’t find in our community print products, such as weather reports, comics, crossword puzzles, advice columns and so much more six days a week.

Our commitment to balanced, fair reporting and local coverage provides insight and perspective not found anywhere else.

Your financial commitment will help to preserve the kind of honest journalism produced by our reporters and editors. We trust you agree that independent journalism is an essential component of our democracy. Please click here to subscribe.

Sincerely,
Charlene Bisson, Publisher, Independent Newsmedia

Please log in to continue

Log in
I am anchor

Edmunds: 0% loans are a smart way to get out of a bad loan

Posted

To spur car sales amid the coronavirus pandemic, nearly every automaker has introduced 0% financing. Getting a 0% car loan can be a smart way to finance a new car.

Edmunds data shows that 26% of vehicle loans in April took advantage of 0% financing. Additionally, an interesting trend emerged from the data: The amount of negative equity with trade-ins, which is when you owe more on your current loan than the vehicle is worth, hit a record high of $5,571.

One reason is that these 0% offers create a scenario in which people looking to get out of a high-interest rate loan can actually save money on finance charges by opting for a new car, even if they owe money on their current one.

Edmunds’ experts usually advise against trading in a car that you owe money on, but we’re living in unusual times and the current financial landscape presents a unique opportunity. If you have a good credit rating and can secure low- or no-interest financing on a new loan, rolling over your negative equity — up to a certain point — may allow you to reduce your monthly payments and save money on finance charges. It’s an opportunity to get out of a high-interest loan on an upside-down car without absorbing a large financial hit up front.

Here are a few scenarios to illustrate the options people have and how they could come out on top. Our baseline, using average loan figures, will be a person currently paying for a 72-month loan with a 6% APR on a $35,000 vehicle.

Current amount financed: $35,000

Interest charges: $6,764 (for 72 months)

Monthly payment: $580

Total loan: $41,764

This person will then move on to an 84-month, 0% loan in the following examples. We’ll also factor in about $5,500 in negative equity that will be carried over into the new loan. Note that the figures below will vary based on how much negative equity you might have.

DOWNGRADE SCENARIO

Perhaps you had a midsize SUV and realized that a small SUV will not only get the job done but also cost less. As a result, you are financing about $5,000 less than your prior loan. This move will save you about $223 a month and more than $11,000 in finance charges.

New amount financed: $30,000 ($24,500 vehicle price, plus $5,500 negative equity)

Interest charges: $0

New monthly payment: $357

Total saved on the new loan: $11,764

EVEN TRADE

If your choice in the new vehicle, or negative equity from your current one, resulted in financing about the same amount as before, you’ll still come out ahead. Not only will you save on the finance charges, but you’ll also have a lower monthly payment. The 0% loan will save you about $163 per month and more than $6,000 in finance charges.

Amount financed: $35,000 ($29,500 vehicle price, plus $5,500 negative equity)

Interest charges: $0

New monthly payment: $417

Total saved on the new loan: $6,764

UPGRADE SCENARIO

Let’s say you couldn’t resist the urge to upgrade, or perhaps the negative equity pushed your new loan higher than the old one. You can still take advantage of the deals, up to a point. The total saved here isn’t impressive at a glance, but your monthly payment will be about $104 less per month with the new loan.

Amount financed: $40,000 ($34,500 vehicle price, plus $5,500 negative equity)

Interest charges: $0

New monthly payment: $476

Total saved on the new loan: $1,764

OTHER CONSIDERATIONS

With a 0% loan, every payment you make goes entirely toward reducing the principal rather than paying down the interest. That means your money goes directly to building equity, and you can expect to have positive equity in your vehicle roughly halfway through the loan. And even though the loan term is longer, you’ll be in a better position to trade your vehicle in before the full loan term if your situation demands it.

Finally, we should note that this strategy isn’t a silver bullet for everyone’s situation. Let’s say your negative equity is closer to $10,000. Using our $35K vehicle as an example, your monthly payments would be lower, but the loan would cost about $3,200 more in the long run.

EDMUNDS SAYS: Even if you don’t qualify for a 0% loan, there still may be lower finance rates available. Check manufacturers’ websites for advertised rates and use a loan calculator to check if the terms will be favorable enough to make the switch.

—-

This story was provided to The Associated Press by the automotive website Edmunds. Ronald Montoya is a senior consumer advice editor at Edmunds. Twitter: @ronald_montoya8.

Related links:

—Rising interest rates mean fewer no-interest auto loans: https://bit.ly/2ARHLcf

—Upside Down and Underwater on a Car Loan: https://edmu.in/3bX2qbv

Comments

X