0% Car Financing vs High Interest Loans

Car dealerships seem to be almost everywhere, trying to sell you the latest, shiniest, freshest smelling new vehicle! Once in a while, they’ll try to entice you with the “Buy now with 0% APR” deals. Since I’ve never bought a new car myself, a part of me was thinking, Hmmm, 0% sounds pretty good… How bad could a decision of this caliber really be? After all, 0% is mathematically a much better rate than one of those super high-interest quick loans of 30% or 40%. So it should win by default, doesn’t it? And no one in their right mind would finance a new car with a high-interest loan…Because that would be crazy, right???

Thankfully, car dealerships are here to save the day by offering 0% APR because they’re on “our” (their) side and looking out for “our” (their) best interests…

The Marketplace

CBC Marketplace recently released a new episode called “The truth about long-term loans”, where they investigated quick money loan services provided by businesses such as Money Mart, Fairstone Financial, Cash Money, Easy Financial, etc. These companies market towards individuals that are deemed high risk and have difficulty getting loans at regular banking institutions. Often, the individual’s difficulty is related to factors like poor credit, job loss, late payment histories, emergency situations, etc.

The major controversy with these loan services is that they have extremely high interest rates, often up to 47%, compared to the much lower (yet still expensive) traditional credit card rates of between 20-24%. These sky-high rates can make a bad financial situation even worse, like paying $20,000 for a $6,000 loan (over a 9 year period).

The episode also discussed how lenders aren’t transparent enough about how much these loans will cost you in interest, often using what appears to be a “low” monthly interest rate (ie: 4%) as opposed to showing the actual yearly rate (ie: 47%). This murky tactic can easily persuade someone to think that these loans are quite affordable.

You might be thinking to yourself “Ah hah! I’m way too smart to fall for something as devious as that!”, to which I would counter, have you ever bought a new car?

How is this related to buying a car?

People LOVE new cars! Common persuasive arguments to buy a new car are because of the “new car smell” or because “new” has somehow become synonymous with being a “reliable” vehicle. Or because a “0% interest rate” is too good to pass up, thus believing it’s much cheaper than a used vehicle with a higher rate.

I would argue that buying a new car from a dealership, even with 0% financing, is equivalent to IF NOT WORSE THAN those high-interest personal loans mentioned above. The worst thing about them is that when you’re buying those new wheels, you’ll be just as easily fooled as at the loan stores.

Everyone has seen car commercials proving how affordable they are by advertising low bi-weekly payment amounts of $150 or $200.

To make new cars seem even more enticing they’ll go a step further and adjust the payments to a “cheaper”, weekly frequency.

Best Current Offers:

Here are some current website offers for several brand new cars (as of Feb 2021):

• 2020 Toyota Camry Hybrid LE: $107 weekly at 4.99%, for 60 mos.
• 2021 Hyundai Tuscon: $65 weekly at 2.49% for 48 mos. (Lease)
• 2021 Hyundai Kona: $55 weekly at 3.99% for 48 mos. (Lease)

Pretty much anyone could afford a Tuscon SUV at that rate, right? And that’s how they get you.

The Tuscon Thought Experiment

We’re going to go on an experiment… An adventure you could say. Just for fun, let’s go on Hyundai’s website and pretend to buy a 2021 Tuscon to find how much buying “new” actually costs you, and see where this rabbit whole of an experiment takes us….

But why a Tuscon? It so happens to be one of the more popular vehicles out there. And I found their website quite user-friendly. Hyundai also has quite an elegant little model selector tool. It’s actually quite neat because it will live update you on how much more in debt you’ll be with each key feature you select and poor life choice you make. It also conveniently provides the weekly finance amount, the annual interest rate, and the term length, which you can manually adjust accordingly.

Strangely, the MSRP price difference between the 2021 and 2020 base edition is only a mere $50, ringing in at $26,099 and $26,049 (plus tax) respectively. The 2021 Tuscon comes in 5 available trims ranging in price from $26,099 to $38,099. Because most of us are neither miserly nor baller status, we’ll go with the middle option, appropriately entitled the “Luxury” trim. This rings in at a pleasantly disgusting $34,426.20 (0% APR) before tax, fees, extras, and interest.

We picked this trim because it has been available for a number of years prior, so it will be useful in a direct comparison we’ll be using shortly. We’ll be using the average annual Canadian mileage of ~15,000km/year and a common loan term of 60 months.

And, we’re going to get the All Wheel Drive (AWD) feature, because… Winter…

Interestingly enough, changing the interest rate to anything more than 0% APR only changes the weekly payment amount. It doesn’t change the final total price shown, making it appear like you’re paying the same amount in the long run. That’s weird. While you might be able to reason this out as a glitch on their site, I would highly doubt it. I would chalk it up to a sleight of hand. It’s almost as if they don’t want you to know how much total interest you’ll be paying them. Of course, why would they? That just might discourage new customers from making a big costly purchase.

$$$ The 60 month build $$$

With the Tuscon Luxury AWD Edition, the listed price is $34,926.20*, with 0% APR financing on a 60-month term. This assumes you have a good enough credit score to even qualify for 0%; most people don’t. Nonetheless, this works out to weekly payments of $134.33. Because we’re concerned that the included “limited” warranty is, well, “limited”, we’ll add the Premium Plus plan for 6 years/120,000 km to give us that nice, warm and fuzzy, false sense of security in case anything real bad happens.

This increases the price to $37,671.20, yet only translates to a small increase in the weekly payment amount, now at $144.89. And we can’t forget about delivery and destination fees which further increases our total to $39,496.20 or $151.91/weekly.

Uh oh, we also need to add sales tax! This brings the final total to $44,630,71 or $171.66/weekly. What’s so interesting is that we added $10,000 to our original price point, yet the weekly payments only increased by a mere~$35. This makes it looks seem so affordable, doesn’t it! And 0% interest! How cool is that?!?!

It’s not.

It’s actually hot. Quite hot. So hot you’ll get burned!

Here’s the kicker. By the time you finish your last payment five years later, the future depreciated value of a 2021 Tuscon will only be worth somewhere between $14,000 to $17,000.

How do I know this? Well, lucky for us there are a couple of free valuation tools available that both consumers and dealers can use to get an estimate on any vehicle’s current and future worth. The first one is the Kelley Blue Book.

The second one is the Canadian Black Book. Dealers usually refer to the black book, and consumers mostly use blue book. However, why not use both!

So now that we know the estimated future value, we’ll go with the higher middle ground of $16,000.

Your High Interest Loan In the year 2026

Imagine it’s the year 2026. You’re 2021 Tuscon is only worth $16,000 ($18,080 after tax),yet you originally paid $44,630.71 for it! What you did there is equivalent to taking out an $18,000 loan over 5 years and paying almost $27,000 in interest. What do you think that would work out to as an annual interest rate?

44%!!!!!!!!!!!**

Yes, you read that correctly. 44% is the annual interest rate on $18,000, which works out to a total of ~$45,000 paid over 5 years. Do you remember how much the annual interest rates were for those high-interest personal loans at Money Mart and such places? Around 47%… And this is only IF you happened to qualify for 0% APR. If your APR happens to be like the Canadian average car loan rate of 4.38% APR, then you would be over 47%. Coincidence? I think not!

Yeaahhh… That’s REALLY… REALLY… BAD! But it’s OK because it only costs you $171/week, so it’s not really that expensive… ….

…Right….

What kind of reasonably sane person would take a 44% interest rate on a car loan by choice?!

“Wait!” You say! “It would be even more money to buy a 2020 or a 2019 Tuscon because of the higher financing rates for used cars! So I might as well buy new anyway?” Congratulations. With that thought, you’ve just lost the game before it even began.

Your First Mistake

If we look at the slightly cheaper Tuscon “Preferred” AWD edition, including taxes and fees price for a new 2021 model is $36,378 ($151.57/week for 60mos @ 0% APR).

In my area, there is a 2020 certified-pre-owned version of the same vehicle for $28,990 ($32,758 with tax), with a little over 10,000 km on it. With the 2021 you might be able to get 60 mos 0% APR which would run you at $151.57/week.

Since the 2020 model is “used”, it will likely have an interest rate attached. Someone with a good credit score might get between 3% – 6% APR. Someone with crappy credit would get a higher APR. Nonetheless, any APR interest >4% for the used 2020 will cost more per month than the new 2021.

“So, you’re saying new is cheaper!?“

Wrong! Both are terrible, life-defining choices, which is why you lost before you even started! A 2020 model shouldn’t be considered a “used” vehicle. Neither is a 2019, or even a 2018. They’re basically brand new. A proper used car should be aged at least 5 years or older.

A proper used

Let’s get back to our original example of the 2021 Tuscon “Luxury” edition that had that terrible 44% equivalent interest rate. What if… we bought a 5-year-old model instead? There happens to be such a model in existence. Actually a whole bunch of them. The Black/Blue book have 2016 Tuscon Luxury models currently listed for an average worth of ~$16,000 ($18,080 with tax).

Using a good credit score loan rate (let’s say 4% APR), our 5-year loan costs a total of $19,978 ($83/weekly). Using the black book’s future value estimator, by 2026, the 2016 Tuscon’s projected worth would be about $6800 ($7680 with tax). This is equivalent to taking out a $7,680 loan at 41% APR over 5 years, resulting in ~$12,298 in interest.

Well crap! That APR rate is almost as bad as the new car rate!

Except…

You’d have $25,000 more in your pocket at the end of the 5 year period. It gets even better the older you go! You would rather be 25 grand richer after 5 years, wouldn’t you? Don’t tell me you wouldn’t! Don’t you lie to me!

The Loan/Debt you choose to have

People who tend to use places like Fairstone and Moneymart for emergency loans typically need the money immediately for sudden unexpected expenses. While it’s not a great idea, unfortunately sometimes it’s the only option available for that situation. The loan often creates excess unmanageable debt quite quickly and can leave the loan taker in a much worse financial situation than when they started.

Buying a new car, on the other hand, is NOT an emergency. In fact, quite the opposite…It’s a luxury. It’s a fantasy. It’s unnecessary. It’s hedonistic. But most importantly, it’s secretly a trap!!!

It will trap you into years of debt repayments, tying up your cash. And by the end of the payoff, not only has the “new car smell” worn off but so too has the car’s value. Its worth will only be a fraction of what you paid for it.

And IF you haven’t paid it off before trading it in for your next “new” car, those dealerships be more than happy to add that lovely extra debt, free of charge, onto your extra sumptuous new debt. The debt-cycle circle will continue forever, and ever, and ever…

Unless you make a change. Time to start buying a proper used!







*Hyundai now shows 2021/2022 models instead of 2020/2021. The 2020 Tuscon I used in the article may have changed price by a couple of hundred dollars since I initially started writing this article. Also, occasionally the Hyundai will have special offers like $500 off. These monetary changes are negligible in the overall calculations.

** I used calculator.net’s auto loan calculator.