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Zero
Percent Interest: How Much Is It Worth?
Zero
percent interest on a car may not be as good a deal
as you think.
Zero
percent interest on a current year model automatically
depreciates the value of all of that car's previous
models. For instance, a 2002 model being offered at
zero percent interest makes a 2001 model worth a great
deal less than it normally would. How?
In
order for the 2001 model to sell over the 2002 model,
the payments on the 2001 model must be lower than the
payment level of the 2002 model being offered with zero
percent interest. The payments on a $20,000 loan at
zero percent interest for 60 months are $333 per month.
These same $333 payments at today's regular bank rates
for 60 months equal only $15,000 (i.e., $5,000 savings
on interest). But to get people to buy the used car
over the new one, you'll have to sell the used car for
$11,000 to $12,000 to produce a payment less than $333.
So you've just lost $8,000 to $9,000 to save $5,000
on interest!
And
don't think dealers don't adjust for such depreciation!
For example, on a $38,000 Ford Expedition, you can get
zero percent interest. On a $38,000 Toyota Sequoia,
zero percent interest isn't available. One year later,
that 2001 Ford Expedition (with 15,000 to 20,000 miles
on it) is worth only $25,000 to $26,000 wholesale, whereas
the 2001 Toyota Sequoia with 15,000 to 20,000 miles
on it still has a wholesale value of $34,000.
Although
both of them originally cost the same, the Ford Expedition
is now worth $8,000 less than the Toyota Sequoia. The
savings on the interest on the Expedition is only about
$6,800 at this point. Consequently, people lost more
money by taking the zero percent interest car than by
going with a car that has no zero percent interest.
We
can also illustrate this point using a Ford Taurus as
an example. A new Ford Taurus has a price of around
$20,000; so does a Honda Accord. The Ford Taurus offers
zero percent interest, which as we've seen, definitely
depreciates the car's value over a year. The Honda Accord
does not offer this 'special' interest rate.
What
happens to the 2001 Ford Taurus? It is worth about $11,000,
whereas the same Honda Accord starting out at $20,000
is still worth from $16,000 to $17,000 in 2001. The
savings on the interest on the Taurus is around $4,000,
but the depreciation on the Taurus over the Accord is
somewhere around $7,000.
Again,
zero percent interest may not be the bargain it appears
to be. As enticing it may seem, you may be paying for
it (through reduced re-sale value) in the long run.
Beware!
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