Why 0% Used Car Finance Isn’t Always the Great Deal You Think It Is

The used car market is flooded with shiny 0% interest deals, but below the bargainous headline few bother to check the small print and true cost of 0% deals. In this post we look at how 0% used car finance deals work, what to look out for, and how to make sure you get the best finance deal for your situation.

What is 0% car finance?

0% used car finance is a common offering on certain models or at certain times of year to help a dealer push sales up and increase forecourt turnover. It is a special offer applied to existing HP and PCP deals.

Whereas when you buy a used car on a standard HP or PCP finance agreements you pay a set amount of interest each month on top of the loan repayment, on a 0% HP or PCP deal you don’t. This deal may be for a set period, such as 12 months, or for the entirety of your finance agreement. 

How does 0% car finance work?

When you take a 0% interest deal, you will pay your deposit and a monthly repayment plan for the value of the car - or part value depending on what type of finance agreement you have - but you will not be charged interest, which may seem a sizeable saving on the face of it.

The issue is often that the 0% advertised is a deal which will only be available to a handful of people. It will often require a large deposit and a high credit score and is a way to get people in the door, but not necessarily for the deal advertised. If it is established that the customer does not have a sufficient deposit, they will be offered alternative finance deals, which carry interest on their purchase.

The True Cost of 0% Used Car Finance Deals

0% finance deals might seem like an obvious choice, but surprisingly they are not always the cheapest option.

Who Funds 0% Interest Used Car Deals?

In short, if you are buying from a main dealer then the financier is usually the marque or car brand you are buying from, or a company linked to them. This is referred to as a captive finance company. An independent used car dealer may have a finance house or range of finance companies they can access who may from time to time accommodate 0% deals to help pick up the pace of sales.

Why Do Dealerships Offer 0% Interest If They Won’t Make Any Money?

If the dealer wants to push the sale of specific used cars, for example those who have been on the forecourt for 6 months or more, or all cars during a quiet time of year when sales are low, slapping a 0% interest deal will help move those cars quickly and make room for more attractive offerings which will sell quickly without the need for a 0% deal. Rest assured the dealer will still be making money, even if it doesn’t look like it. – The way it works is that the dealer gets paid the advance (i.e. the amount of the loan) but he will have to pay a ‘subsidy’ to the finance house to compensate for the interest they are not making on the agreement. So, normally, the dealer will build a potential subsidy into the price of the car so, in other words, put the price up.

What Car Dealers Don’t Want You to Know About 0% Used Car Finance Deals

What looks too good to be true usually is, and it is no different with 0% finance used car deals. Let’s look at some examples of what to look out for when sizing up a 0% finance deal. 

Who Qualifies - The first thing to check when looking at 0% used car finance deals is if you will qualify. While the advert may offer a great deal, it’s not uncommon for that particular offer to be available to a small selection of people with exceptional credit scores. Once you have made contact or are in the dealership, you may be offered something quite different.

Part Exchange Value - You may find that your part exchange is valued lower than you might expect against a 0% finance deal. If the dealer can get you to agree to the lower px price they can make some or all of their lost interest back immediately. NB it’s not the dealer’s lost interest, it’s the finance house’s

Initial Price - You find a car you want on a 0% interest deal, it costs £6,000. The same car is for sale up the road for £5,500 with a 5% interest rate. You may assume the interest will come to more than £500 so you should take the 0% deal, but make sure you do your math. In this instance the interest would come to £275 on the second car and you are losing out by taking the 0% finance deal.

Interest Rate - Just a small difference in interest rate on a finance deal can make a significant difference to the amount you pay each month. Your used car finance manager will ensure you are aware of all the best deals available to you and the interest rates associated with them. Make sure you can comfortably make the repayments for the entirety of the agreement, including the interest.

Administration Fee - At most used car dealerships the price you see on the screen is the price you pay. Once commonplace as an additional fee and unpleasant surprise, it is fairly rare to be accosted with additional fees above and beyond the price you were expecting to pay, but it is not unheard of. Although the Consumer Protection from Unfair Trading Regulations of 2008 note that additional fees count as a ‘misleading action’, research carried out by WhatCar in 2019 found a small number of dealers still adding upwards of £500 to the price of a car in fees. 

Sneaky hidden fees can cost you a lot of money with little to show for it. Make sure the dealer you buy from is transparent about all of their fees and that the price you see is the price you pay.

Upselling - Another way for dealers to compensate for 0% interest deals is to upsell products to you. This means they will offer you a range of products and services at an additional cost which may or may not be to your benefit.

Some make good sense, such as upgrading your used car warranty or adding paint protection if you do a lot of miles and can justify the cost. 

You may be offered a range of extras beyond this, sometimes at prices much higher than you could get them done yourself, for example third party retro fits like towbars and window tinting. A couple of upsells will easily make up for the lost interest on a used car.

Other Factors to Be Aware of When Considering 0% Finance Used Car Deals

A couple of other pointers to remember when looking at 0% finance used cars:

Affordability - Make sure you can afford the deposit amount comfortably and don’t let a 0% interest finance deal tempt you into agreeing more than you can afford monthly for the full term of the agreement.

Residual value - Bear in mind that the RV you are offered at the other end could be lower than expected resulting in higher monthly costs on your finance agreement and a disappointing sale value. 

Used Car Finance Deals from DCC 

At DCC we rarely offer 0% interest finance deals. Instead, we pride ourselves on offering competitive rates of finance to all customers, on all vehicles, all year round. We design custom finance quotations based on your individual needs to provide affordable, responsible finance agreements to suit you.

Take a look at our live used car stocklist, each car has a finance example right there on the thumbnail so you can quickly and easily see what your finance repayments could look like. If you’d like to find out more about used car finance from DCC or speak to a finance manager, contact our finance team today at Southampton or Fareham to discuss your requirements.