At some stage of your business life you would have been marketed directly to by a salesman at a dealerships pitch of being offered the dream Zero percent (0%) asset finance or very low interest rate finance on vehicles, trucks and machinery you were looking to purchase.
Today, we are here to explain how Zero Percent Finance works, how genuine it is or is it just a ploy to generate more sales by the dealership selling to you?
The low down on Interest Free Vehicle, Truck & Machinery Loans
Zero percent (0% Interest) vehicle, truck or machinery finance are designed to generate more sales by the dealership and to make sure the customer “feel” like they are getting an extremely good deal on their purchase! Zero Percent Finance how good is that! Well let’s do a little bit of a deeper dive in to it before you agree.
Manufacturer’s started to use these no and low interest loans frequently post the GFC to reduce growing inventories during difficult sales periods and move their stock quickly. This being said, the industry is still seeing heavily subsided vehicle, truck & machinery finance still being offered today to tempt vehicle, truck or machinery buyers to firstly put their brand first, then to consider upgrading, and also potentially purchase a “slow moving model” or a model that is about to be replaced with a newer version coming out shortly.
These no interest loans are typically offered by the lending divisions of the manufacturers which are otherwise referred to as “captive finance companies”. For instance, Scania Trucks use Scania Finance to lend money to truck buyers who want to drive a Scania and works with Scania Finance to structure these low interest loans. Each dealership has its own captive lender whose role it is to support the sales of the vehicle manufacturer.
These companies use the low rate interest financing to attract buyers to their brand, and they make the profit on the inflated price of the asset rather than on the interest they make on the finance. However, this doesn’t mean you have to get a loan from the captive finance company – dealers are happy to accept the money from any financial institution as they are still getting the sale – but this is where you can often find the lowest rates – as they are subsidised or otherwise known as “subvented” interest rates .
What is a subvented interest rate loan?
The No Interest or Low Interest being advertised for vehicle, truck or machinery purchases is legitimate and is often referred to within the industry as a “subvented” interest rate, where the rate for the finance package is being subsided by the manufacture, or dealer, out of the profit made on the inflated sale price of the asset.
Manufacturers generally arrange these subvention finance programs for specific models at their dealership via their captive finance company as a tool to promote more sales of that model. A subvention finance program does not cost the finance company making the low interest offer money as they make up this money in another way.
This is since the loss of interest of the low interest rate loan company is subsided or offset, by the manufacturer and remitted back to the finance company within 90 day of the asset purchase from the profit they make from the sale.
You will find that almost all of the time the asset price is not negotiable, or it can only be discounted to a certain value if the low interest finance option is to be taken by the customer. This would be a much different sales conversation if the customer was looking to purchase the asset in “Cash”.
Should you consider a zero interest or low rate loan & will you qualify
Yes, you can always consider a zero interest or low interest rate vehicle, truck or machinery loan, however, do your homework regarding these offers and understand their limitations. Paying no interest on a new vehicle, truck or machinery may sound impossible, but it is possible for certain individuals.
Whilst you may qualify for a zero interest of low interest loan, you may not want the added pressure of higher loan repayments on a shorter term and other loan conditions, such as final lump sum or balloon payment at the end of the term.
Vehicle, Truck or Machinery dealerships only offer the 0% interest on low interest financing on specific models, using a specific marketed loan structure which will always be on a much shorter term. For instance, these 0% Percent Finance offer will always be on 3 to 4 year terms and have some form of final lump-sum or balloon payment.
Due to this, in order to qualify for these finance approvals, buyers need to be able to demonstrate a strong ability to service the higher loan repayments or provide additional security, coupled with a high credit score and a long time in business.
Responsible lending obligations require finance companies to be vigilant when assessing these types of loan application to determine that the customer can meet all their financial obligations without any financial hardship. Consequently, there are significant credit hurdles that must be satisfied to meet the higher loan repayments on these zero percent finance offers.
What are the Pros & Cons of Zero Percent Finance?
- Increased Purchasing Power: A 0% interest loan combined with a deposit or large balloon repayment may enable you to secure a higher loan amount and an upgrade to a dream model purchase you didn’t think was possible.
- Added Optional Extras: When choosing your new vehicle, truck or machinery, there may be options available. With a 0% Interest loan, you may be able to roll the costs of these extras into the finance offer as well
- Fixed Priced Servicing: With a 0% Interest loan from a dealership being offered, you may be able to get a bonus of fixed price dealer servicing into the cost of the loan. Check this fact before signing the contract with the dealer.
- Highly Inflated Retail Price: The price of the truck is almost certainly going to be higher on 0% percent finance. Check first online for the average price of the vehicle, truck or machinery without the zero percent interest before going to the dealership. You will find that taking the higher inflated price with the lower interest rate on a shorter term may in fact not be the right solution for your business when you compare it to a negotiated lower price, on a long term 60 months/5 years and financing through a traditional banking interest rate of 3.5%-6%
- Large Deposit or Long Time in Business: Whilst some dealerships do offer a no deposit options for 0% finance, most deals are likely going to require a large deposit when you entered the terms for a Zero Percent Finance purchase or you would have to be in business for a long time
- Higher Loan Repayments: Zero Percent Finance will always be on shorter loan terms (36 Month being the 0% Interest average) help reduce the total exposure a dealership or manufacturer has to these types of loans however with the shorter terms it increases the customer’s monthly repayments and enforces risker higher balloon payments to make it affordable
Here are some example offers?
Before you get carried away with Zero Percent or Low Finance offers make sure you weight up all the Pros and Cons when considering this type of arrangement, investigate other type of loan options available in the market and make the correct decision from there.
We always want our clients to receive the best deal possible. If we firmly believe your Zero Percent Finance offer is a good deal, we will let you know. Yakka Finance will run through both of the numbers with you so you can make an informed decision not just a clever marketing decision.