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

A zero percent car loan creates a scenario where people looking to get out of a high interest rate loan can actually save money on finance charges by switching to a new car, even if they do. owe money on the current car.

To boost car sales amid the coronavirus pandemic, nearly all auto makers have introduced 0% financing. Getting a 0% auto loan can be a smart way to finance a new car.

Edmunds data shows that 26% of auto loans in April benefited from 0% financing. Additionally, an interesting trend has emerged from the data: the amount of negative equity with swaps – that is, when you owe more on your current loan than the value of the vehicle – has hit a record high of $ 5,571.

One of the reasons is that these 0% offers create a scenario where people looking to evade a high interest rate loan can actually save money on finance charges by opting for a new one. car, even if they owe money on the current car.

Edmunds experts generally advise against trading in a car you owe money on, but these are unusual times and the current financial landscape presents a unique opportunity. If you have a good credit rating and can get low interest or no interest financing on a new loan, carrying over your negative equity – up to a point – can allow you to lower your monthly payments and save money. ‘save money on finance charges. This is an opportunity to get out of a high interest loan on an upside down car without absorbing a big financial blow up front.

Here are some scenarios to illustrate the options people have and how they might come to the fore. Our baseline, using average loan numbers, will be someone who is currently paying a 72 month loan with 6% APR on a $ 35,000 vehicle.

Current amount funded: $ 35,000

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

Monthly payment: $ 580

Total loan: $ 41,764

That person will then switch to an 84 month 0% loan in the following examples. We will also factor in approximately $ 5,500 of negative equity that will be carried over to the new loan. Note that the numbers below will vary depending on the amount of negative equity you may have.

DOWNGRADE SCENARIO

Maybe you had a midsize SUV and found that a small SUV will not only do the job, but also cost less. As a result, you are funding approximately $ 5,000 less than your previous loan. This move will save you around $ 223 per month and over $ 11,000 in finance costs.

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

Interest charge: $ 0

New monthly payment: $ 357

Total saved on the new loan: $ 11,764

EVEN TRADE

If your choice in the new vehicle, or the negative equity in your current vehicle, resulted in funding of roughly the same amount as before, you will still have the edge. Not only will you save on finance charges, but you’ll also benefit from a lower monthly payment. The 0% loan will save you around $ 163 per month and over $ 6,000 in finance charges.

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

Interest charge: $ 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 maybe negative equity pushed your new loan higher than the old one. You can still take advantage of the offers, 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 (vehicle price of $ 34,500, plus negative equity of $ 5,500)

Interest charge: $ 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 to reducing the principal rather than paying off the interest. This means that your money is going straight to equity creation and you can expect to have positive equity in your vehicle at roughly half of the loan. And even if the term of the loan is longer, you will be in a better position to trade in your vehicle before the full term of the loan if your situation requires it.

Finally, note that this strategy is not a miracle solution for everyone’s situation. Let’s say your negative equity is closer to $ 10,000. Using our $ 35,000 vehicle as an example, your monthly payments would be lower, but the loan would cost around $ 3,200 more in the long run.

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

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

Related links:

—Higher Interest Rates Means Less Interest Free Auto Loans: https://bit.ly/2ARHLcf

– Upside down and underwater on a car loan: https://edmu.in/3bX2qbv

Copyright © 2021 The Associated Press. All rights reserved. This material may not be published, broadcast, written or redistributed.


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