'Zero-percent' deals include hidden interest

Dear Bruce: I would like to buy a new car. You’ll notice I said, “I’d like to buy.” The car that I have is quite serviceable. We can afford the payments on the present car without a strain, but I would just like new wheels. I keep seeing the “zero interest” for five years or more advertised. I can’t help but think this is a wonderful deal. My wife, however, keeps throwing platitudes at me such as “there’s no free lunch,” “if it’s too good to be true,” etc. – N.W., (no address given)

Dear N.W.: Sorry, tiger, you lose. There is no such thing as a free lunch; your wife is correct. If you take the “no-interest deal” the interest is packed in there somewhere. Admittedly, it is offered because the finance arm of the automobile manufacturer wants to move cars. You’ll notice that, in almost all of those deals, if you do pay cash, you can get a several-thousand-dollar rebate, which you give up if you take the no-interest deal. In effect, the interest on the loan is the rebate that you forfeited. Further, the idea of financing a car for five, six or seven years is pure insanity. Unless you can pay off a car in three years, you should not be purchasing it. Simply put, you’ll owe more than the car is worth. While I know insurance can be purchased to cover this differential, that is yet more expensive.

Dear Bruce: My husband and I have always purchased used vehicles. We can’t afford to pay cash, so we took out low-interest car loans. We usually drive our vehicles for a long time. We had our last car for 10 years. Unfortunately, they aren’t worth much when we do get rid of them. We have discussed leasing a car for my husband. He has a short commute, so we’re not concerned about going over on the miles. My question to you is, is it wise to lease this second vehicle considering we never have anything left when we sell it anyway? – Paula, via e-mail

Dear Paula: If it isn’t broken, don’t fix it. You say you can’t afford to pay cash; most people can’t. The key to this is that you have driven your vehicles for as much as 10 years. You are certainly getting your money’s worth. While they are worth very little when you are finished with them, look at it this way: Suppose you had a payment of $300 to $400 a month, which would not be out of the ordinary. If you continue to make that into a savings account of your own for the six or seven years after the automobile is paid for, you’d have enough to pay cash. I think what you are doing is perfectly viable. I wouldn’t change a thing.

Dear Bruce: You say you never advocate a five-year lease or loan on a car. I can see a lease, but why not a loan? With the prices we pay for cars, they should last longer than five years without a major problem. Is it advisable to buy a better quality car than a “cheaper” one? – L.B., Big Flats, N.Y.

Dear L.B.: The troublesome part of five-year financing is that the majority of people who do this put little or no money down. As a consequence, they are “upside down,” or owe more on the car, for most of the loan. If anything happens to the car, they are stuck for the deficiency. Cars should last longer than five years, but when you add on five years of interest, you are buying something that you cannot afford. This is why they extend the payments to get the monthly payments down because so many people don’t look at the price, it’s only how much a month. If you can’t afford to pay it off in three years, you can’t afford the purchase.

Dear Bruce: My daughter has just informed me that she leased a car for four years. The lease is 15 months old. Now she wants to return the car. Can she do that? What are her options? – Reader, via e-mail

Dear Reader: Your daughter has entered into a contract for 48 months, and unless she adheres to that contract, the penalties can be severe. Of course she can return it and the car will be sold at a huge loss, and then she will be responsible for the difference. It may be that there is a buyout clause in the lease. Another possible option is to exercise the part of the lease that would allow her to buy the car now and then sell it. Unless there is some compelling reason (and compelling is not defined as “I don’t like the car”), she would be best to do whatever she can to continue in the lease until the end and learn from the experience. So many young people jump into these things on impulse. Unfortunately, they find out the hard way that although the payments sounded manageable, they can be crushing.

Dear Bruce: I am retired with a fixed income of about $50,000, and I want to buy a new vehicle. Would it be better to borrow the money to pay for the vehicle, or use some of my interest-bearing principle, which would drop my yearly income somewhat? – D.L., via e-mail

Dear D.L.: This is not a simple question. First, your interest-bearing principle brings in very little income. Because of this, the way to go is to pay cash. You may be seduced by the idea of zero percent finance charges, but most of these deals are smoke and mirrors. If you look closely at most zero percent deals, you’ll find that paying cash gets you a very substantial discount.

That discount represents the interest “that you’re not paying.” In today’s world, you will be better advised to pay for the car upfront, if you are able, even if it means reducing some of your investments. While your income will be reduced, so will your need to write monthly checks every month, which would be the case if you financed.

Bruce Williams is a national radio talk show host and syndicated columnist.