Is 0% on a new car always the best financial decision?

July 16, 2020

Amid the current Covid-19 pandemic many car dealerships are offering 0% interest on the purchase of a new vehicle. You can purchase the newest and best model while not paying a dime of interest! What could be better? This sounds like a deal too good to pass up. But is 0% interest going to save you money? Is it as good of a deal as it seems?

Kelly Blue Book states, “The rate of car depreciation varies depending on the year, make and model of the car. The first year always sees the greatest depreciation hit against the car's market value, with most cars losing about 20% or more of their original value.”

Twenty percent in one year? That’s a significant decrease in the value of your new car. However, you saved all that money from not paying interest, right? Let’s take a look. Say you were to purchase a $30,000 vehicle with 0% interest for 72 months. In first year alone that vehicle would decrease in value from $30,000 to $24,000. That’s $6,000 dollars in just the first year!

According to Kelly Blue Book, “Smart buyers looking for a good deal can make car depreciation work in their favor. Used cars are much lower in price than new cars because depreciation affects a car regardless of its condition. You can purchase a 1-year-old car that's nearly as good as when it was new, but you'll pay only 80% or so of the original price.”

Fast forward one year. Now consider your friend purchases the 1-year-old vehicle, with low miles in perfect condition, for the depreciation included price of $24,000 with an interest rate of 3.24% APR. You might say, “They have to pay interest and I didn’t.” That’s correct. But just how much in interest will your friend pay in comparison to your financial loss of depreciation?

Your friend who purchased the 1-year-old car for a 72 month term with Goldenwest Credit Union’s low interest rate of 3.24% APR, will pay under $2,500 of interest over the entire life of the loan! That’s nearly two-thirds less than the amount your car depreciated in one year.

The next time you purchase a vehicle, remember that 0% financing might not be as good as it sounds. If you choose to purchase new, losing 20% or more of the original value can create a large gap between what you owe and what your car is worth. This gap can create some problems. If the vehicle is totaled, stolen, or sold within the first few years, this gap could be thousands of dollars. Luckily, Goldenwest Credit Union offers GAP protection that can help ease the insurance concerns.

During these uncertain times, where people need to make smart financial decisions, taking a closer look at the numbers can save you thousands of dollars! If purchasing a new vehicle is in your near future, contact your local Goldenwest branch or our Contact Center at 801-621-4550 and speak with a loan officer to learn what options are best for you.