Learn Why Zero Percent Auto Financing is Not Actually Free Money

The requirements to qualify for zero percent auto financing mean it is not free money. In fact, it is more expensive than many other alternatives.


As any good economist will tell you, there is no free lunch.

But, what about those 0% auto loans we see advertised all the time? Isn’t that free?

Nope.

There is no free lunch. And a bank is certainly not going to let you have $30k or $40k for five years for free.

So, how can zero percent not be free? Keep reading to find out.


A Tale of Two Cars

It was the best of cars, it was the worst of cars…

In order to understand why zero percent financing is absolutely not free, we need to understand opportunity costs. Economists define opportunity costs as whatever you have to give up in order to get what you want.

In this case, you want zero percent financing. In order to get that you have buy a new car. That means you give up the ability to buy a used car.

I have heard the rationalization a million times. You need a new car because RELIABILITY! And, don’t forget about SAFETY! Older cars, apparently, break down immediately after driving off the lot, and then they burst into flames and kill everyone inside. Therefore, you MUST buy a new car. Well, I’ll debunk all of that later. But for now, we can set up the opportunity cost discussion.

Let’s take a look at two cars of an identical make and model. One is brand new, and the other is one year old.

Behind Door Number 1: A New Car!

According to Edmunds, who tracks this sort of thing, the average new car in the US is about $37k. Plus, they also report that cars lose about 20% of their value during their first year of service.

So, in order to qualify for this zero percent auto financing, you have to buy something for around $37k, which will be worth about $30k in a year. Even without paying a penny in interest, owning that car will cost you about $7k in the first year.

Behind Door Number 2: A 1-year Old Lease Return!

But, what if you bought a 1-year old lease return? It could be the same make and model as the new car, but with 10,000-15,000 miles on it.

This used car will cost you about $30k to purchase, and if you get a loan, the interest rate will not be zero. In June, 2020, Chase Bank is quoting 3.14% APR for a 1-year old car purchase with excellent credit for 60 months. Assuming you finance the entire purchase, the payment will be about $541. The total payments, therefore will be about $32,450. Which means you will pay about $2,450 in interest during the life of that loan.

Yes, the $2,450 in interest that you pay on this deal is more than the $0 percent interest you would pay if you got the new car. But, you have to pay $7,000 more for the car to get the 0% interest. So, the total cost of new car is about $4,500 more than the used car.

What About Reliability and Safety?

I have heard this argument more times than I can count. People tell me they like to buy new cars because they are more safe and reliable than used cars. Well, that’s just silly.

I’m going to tell you a little secret. Okay, it’s not a secret, you already know it. But for some reason you forget it when you buy a new car. Here goes:

If you buy a new car and drive it for a year… you are now driving a 1-year-old used car.

So, if you are willing to buy a new car and drive it for a year, even though it has magically lost some of its reliability and safety, then you should also be willing to buy a year-old lease return. It’s the exact same thing! Except, less expensive.

Let’s say you want to own a car for five years. If you buy a new car you get to drive it for years 1 through 5. If you buy the lease return, you will drive it for years 2 through 6. You cannot convince me that there is a big difference.

Know What You’re Getting Into Before You Buy

Buying a new car is fine, if you can afford it. It is a luxury.

In this example, you are paying approximately $4.5k extra for the privilege of putting the first 10k to 15k miles on the car.

As always, this is a judgement free zone. If you want to spend your hard-earned money on putting the first few miles on a car, go for it.

However, if you’re struggling financially, or you haven’t gotten as far as you’d like on your goals, then maybe this isn’t the time to buy a new car.

Either way, transportation costs are a huge part of Americans’ budgets. A one-time decision impacts your finances for years. So, do what you want, but be sure that you understand what you’re doing before you sign anything.

Before you buy a new car to get the zero percent auto financing, just be sure you know that there are about $4,500 of extra costs hiding in the deal.

But Wait… There’s More!

The math get’s even more exciting if you’re willing to drive a slightly older car. Lease returns generally come in after 12, 24, or 36 months of use. So, you can almost always find a 1, 2, or 3 year old car in the exact make and model you want. Again, according to Edmunds, after 2 years cars have lost about 30% of their value, on average. After 3 years, that number climbs to about 40%.

Here’s the math on choosing a slightly older model of a $37k car.

If you buy it after 1 year, you save $7k on the purchase price, but have to pay interest of $2.5k. Saving you about $4.5k of total cost to operate the car.

If you buy it after 2 years, you save $11k on the purchase price, but have to pay interest of $2.1k. Saving you about $8.9k of total cost to operate the car.

If you buy it after 3 years, you save $15k on the purchase price, but have to pay interest of $1.8k. Saving you about $13.2k of total cost to operate the car.

Now, no one is going to convince me that a 2017 car is significantly more dangerous to operate than a 2020 car of the same make and model. That’s silly.

Sure, a 2017 may be more likely to have a part that needs replaced in the next 5 years. But, I’ll have an extra $13,200 to make those repairs and still be dollars ahead.


Side note: the savings get even bigger if you save up and pay cash for these cars. Then there’s no interest expense at all!


Final Thoughts

Decisions on how much you are going to spend on housing and transportation are incredibly important. For most of us, those two expenses make up a huge proportion of the monthly expenses. And, the chance to change either of those expenses comes along very rarely.

That’s why it is so important to understand what you are signing up for when you move and when you change cars. This decision will impact your finances for years.


Zero percent auto financing is not free money. It is a marketing technique to get you to spend significantly more when purchasing transportation.

You do not have to sacrifice safety or reliability. Cars have not made massive improvements in either area in the last few years.

That is not to say that no one should ever buy a new car. This is always a judgement free zone. I don’t care what you spend your money on. However, if you want to get ahead financially, buying a 1-, 2-, or 3-year old lease return is a great way to drive a nice car and reduce your total cost.

For more on buying a car, check out my article on Financial Rules of Thumb to help you set a reasonable budget.

Learn about how positive cash flow is as valuable as huge investments in my article about Using Cash Flow to Build Wealth.


I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.

4 Replies to “Learn Why Zero Percent Auto Financing is Not Actually Free Money”

    1. Thanks for your comment! Your analysis was super interesting. I do remember when the Prius really started becoming popular in the US, new ones were difficult to find, and used ones would sell for very close to the value of new ones. That matches up with your analysis, where the Prius in your example only depreciated 15% in two years, vs the 30% estimated by Edmunds in my research. So, it makes sense that it is easier to justify buying a new vehicle in a model that holds its value better. And yet, even with the higher retained value, you show that it was almost $1,000 less expensive to buy the older model. I guess that makes a 2012 vs 2014 Prius a much less straight-forward decision. I wonder if there are makes & models in 2020 that are similar. Tesla maybe?

      1. Do tax credits transfer for a used Tesla purchase? If not my guess is buying new TSLA for tax credits, if they are still available, would make the cut.

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