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Zero % Interest – Fact or Fiction and Who Pays?

Zero % Interest – Fact or Fiction and Who Pays?

When you look at buying a new car or machine and the dealer quotes you a zero or very low interest rate, the first thing you should do is ask yourself the question – “who pays for my cheap interest rate?”

You also need to understand that with every purchase where finance is involved there are 3 parties to the transaction:

·         The bank or lender

·         The dealer

·         You

Let’s take a look at each party to the transaction:

The Bank – banks borrow from the public (term deposits) at rates of 2.50% to 3.00% so they can lend out to you and other borrowers  at 4, 5 & 6% or more.

For a bank to give you zero % interest they are losing money at a rate of at least 3% plus all their administration costs. This is not going to happen. They want their minimum 4 to 6% from you or they won’t do business.

That only leaves either the dealer or you who pays for the zero % interest.

The Dealer – Dealers are in business to make money. They must cover wages, rent, electricity, water rates, superannuation, holiday loading, payroll tax, etc etc and to finance your interest charges is something they won’t do unless they make it up somewhere. Dealers aren’t benevolent, if you think they are – try getting your car / machine serviced for nothing.  

For a dealer to provide you a zero % interest they have to pay the bank the equivalent of say 5%.

There’s only one party left to cover these costs…

That Leaves You – like it or not you pay for zero interest.

You will note that these type of deals generally  have specific terms – usually 3 or 4 years and sometimes have a deposit going in. The arrangement is inflexible.

Without going into exact specifics, this is basically how it works.

Machine Sale Price


10% Deposit                      


Amount to be Financed


Loan Term

36 months

Monthly Repayments @ zero %  


Monthly Repayments @ 5%


Total Interest Charges @ 5%***  


*** Someone needs to pay these interest charges.

The dealer will send their invoice to the bank for $36,000.00 but then gives a discount of $2,700.00 to the bank, therefore leaving the bank to pay the dealer only $33,300.00. In other words the dealer gives a discount on the purchase.

“The finance industry has a term for these arrangements -  “subvention agreement”

In most cases (especially motor vehicles) you’ll find the dealer will charge the full Recommended Retail Price of the goods if you are taking up their 0% or low interest finance offer. This is to ensure they make sufficient profit on the sale to cover the discount they’re giving to the bank. Here’s a basic example to further show you how it works:

Jenny and Kylie are both in the market for a new Ford Territory. They’ve done their research and found the recommended retail price is $45,000.00.

Jenny goes to her local dealer who offers her a special 0.9% finance offer which sounds great, but what Jenny doesn’t realise is the finance offer can only be used if she pays the full recommended retail price of the car, and the loan must be taken over a 3 year term.

Kylie on the other hand spoke to Hunter Business Finance and organised a finance approval at a rate of 4.5% before heading into the dealer. With her finance already approved Kylie was in control of the negotiations, and because she wasn’t using the dealer’s 0.9% finance offer she was able to negotiate the price of the vehicle down to $40,500.00.

Let’s see how each deal compares:





Vehicle Price: 

$45,000.00 (RRP) 

Vehicle Price:   


Interest Rate:  


Interest Rate: 


Loan Term: 

3 years  

Loan Term: 

3 years


$1,267 per month


$1,205 per month

Total Amount Paid: 


Total Amount Paid: 


Not only did Kylie have the flexibility to negotiate the price of the vehicle, she also had the option of choosing a longer or shorter term to suit her budget and is not restricted by the terms of the dealer’s “Special Offer”. Plus, because her finance was through Hunter Business Finance the money was hers to use at any dealership or on any vehicle she liked.

There are so many different dealers selling the exact same vehicle or machine, it definitely pays to compare a few prices before making that final decision. If you walk into the dealership with your finance all ready to go, they know you are serious and will be more willing to negotiate a deal.

With any negotiation (and purchasing a car or machine is a negotiation), if you relinquish more than one aspect of the purchase to a dealer you have lost or are in real danger of losing control. Getting them to do your finance gives them an advantage over you they don’t need.

Stay in control of the purchase and you will get the best deal.



Posted: 8/03/2016 11:45:49 AM by Hunter Business Finance | with 0 comments


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