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What 0% car finance can end up costing you in the long run

Matt Hopkins

This article has been sponsored by CUA.  »

The world of car finance can be just as tricky as navigating home loans. There is often a multitude of options to compare, especially when it comes to low or no-interest car loans. While they might sound like a fantastic deal, these loans often come with a catch. As the old saying goes, if something's too good to be true, it probably is.

In fact, cars purchased on 0% or 1% interest finance plans can often end up costing you more than a traditional financing option. If money isn't being made on the interest, it's almost certainly being made up somewhere else.

As CUA points out, this could be as simple as inflating the cost of the actual car so you end up paying more than it's worth. "Generally the lost interest will be factored into the upfront cost of the car, so you'll probably find the price of the car will be non-negotiable," the credit union says.

Stephen Corby of Cars Guide presents a good example of how a no-interest loan can compare to traditional car financing, crunching the numbers on both.

"If you can buy a car with a normal finance deal, at say 8.0%, for $19,990, that's still going to be cheaper than buying one at 0% if that same car costs $24,990 under your "special" 0% deal," he writes.

"Because this is what car companies will sometimes do, basically as a way of recouping the cost of offering you "0% finance", for example. They give you the low rate, but bump up the price of the car, or add on extra fees, delivery costs and charges. Again, it's all about reading the fine print."

Corby goes on to explain how the $19,990 car at 8% interest over three years equates to repayments of $624 per month, which would leave you paying $22,449 in total, or $2,541 less than the $24,990 car at 0% interest.

As well as paying more, CUA also notes that many 0% loans will usually have higher repayments, as they're often locked into shorter repayment periods compared to traditional car loans. You may even be contracted into certain servicing intervals with the manufacturer, which may charge more than an independent mechanic. Venturing outside of this agreement will often void the warranty on the vehicle.

Rather than making standard repayments, some no-interest car financing may also require a lump sum to be paid at the end of the loan, sometimes referred to as a "balloon payment". On the other side of the coin, you may need to have a larger deposit ready to go to qualify for the loan.

This isn't to say you can't negotiate a better deal on a 0% loan, but it definitely pays to be diligent. Compare them with 0% loans from other dealerships, as well as financing options from other lenders. The easiest way to do do this is via online comparison sites like Canstar.

CUA offers loans with a number of advantages like unlimited free extra payments, no penalties for early payout, no monthly fees and easy access to redraws.

While the allure of no interest may sound like a great deal, it rarely is. Always do your homework before taking the plunge on any loan.