Buying Advice: 0% or Big Discounts?

01 July 2024 BY Jean-Sébastien Poudrier


One can say that the automotive industry has changed significantly during and since the Covid-19 crisis. Not too long ago, dealers had the upper hand due to reduced inventory and high demand. Add to that the sharp increase in the prime rate, which explains why interest rates skyrocketed and discounts were practically non-existent for years.


However, things have changed since the beginning of 2024, and we have experienced our first drop in the prime rate this year. Automakers have managed to better supply their dealerships, and demand is slightly down compared to supply. All this has led manufacturers to rethink their marketing strategy, and for the first time in a long while, we are starting to see 0% offers for certain models at several dealerships in the new vehicle department. Moreover, this is not the only strategy that has made a comeback, as others have decided to offer significant discounts. In short, all this has led people around me to start asking me a lot of questions about this topic. As I am convinced that this is also the case for many others, I have decided to share my perspective on the situation.


Why Two Different Strategies?


At the core, it\'s all about marketing and profit. Understand that the 0% financing offered by automakers is not a gift from the bank. You should know that in most cases, the manufacturer subsidizes the rate themselves because, for some buyers, the interest rate is the only thing that matters. Other manufacturers prefer to simply give a big discount on their vehicles. However, do not make the mistake of believing that the result will be the same for you in both cases—quite the contrary.


0% Financing


Let\'s first talk about the famous 0% financing and why this option can be very appealing to some buyers. First, you need to understand that the price you pay for the vehicle upfront is higher. Let\'s take a vehicle with a base price of $50,000. If you are entitled to a $10,000 discount or 0% financing, which would you choose? In our scenario, imagine the payment is $1,000 per month in both cases. After the first payment, you will owe $49,000 on your vehicle with 0% interest, whereas the principal should be around $39,650 with the big discount because part of the $1,000 is applied to the principal and the other to interest. I\'ll spare you the complex calculations, but the idea here is that it takes you longer to reach the same balance, which can have a negative impact if your vehicle depreciates quickly, and this is where research is necessary. On the other hand, if you opt for a vehicle that retains its value well, it might be preferable to go for the 0% financing because if you pay off your loan in full, you would have paid between $5,000 to $10,000 in interest. So, in summary, your vehicle, which was worth $50,000, will have cost you over $60,000. It\'s not an exact science, but it gives you a good idea of the situation.


Big Discounts


If you like to change vehicles regularly or plan to pay off your vehicle faster than expected, the big discount with an interest rate, even if high, can be your ally. Again, you need to do the math, but I can assure you that I have seen people save several thousand dollars by opting for this option. In the end, it is especially important to calculate carefully and know your situation well.


Jean-Sébastien Poudrier