Is 0% financing for you? How not to get duped when buying a car

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Spring is when many Canadian motorists feel the urge to buy a car. What better way to welcome the warmer weather than to hit the road — now clear of snow and salt — with a brand new set of wheels?

But giving in to those instincts without crunching the numbers is almost certain to lead to financial regret.

First of all, there’s the question of figuring out what you can afford. Buying too much car is one of the reasons why people end up with unmanageable debt.

You should never spend more than 20 per cent of your income on debt payments other than your mortgage, said Scott Hannah, head of the B.C.-based Credit Counselling Society. Make sure your car payments don’t push you over the edge.

Then there are carrying costs, which can vary significantly depending on the car you’re buying. Filling a 60-litre tank with premium rather than regular gasoline costs about $12 more, which quickly adds up, noted Allan Tran, a Hamilton, Ont.-based business development manager at Meridian. If you’ve narrowed down your search to two or three options, you might want to get an advance quote from your insurance broker for each of them to see which will cost you less.

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And then, of course, there are maintenance and repair costs, which will easily cost you $700 a year, just in the first five years or your vehicle’s life, and considerably more thereafter.

But walking into a car dealership with a firm idea of how much you can spend for your new ride is only half of the battle. The other half is sticking to it.

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Here are a few tips to help ensure that you drive off the lot with a financial commitment that actually matches your budget:

Shop at the end of the month

“You’re more likely to get a deal at the end of the month,” Hannah said.

Like most salespeople, dealers generally face monthly sales targets. As the deadline approaches, they will typically be more amenable to lower prices a little to close one more sale.

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Pay attention to monthly, not weekly or bi-weekly payments

Dealers often quote weekly or bi-weekly car payments, but that’s not how most people budget. And the math involved in converting those costs into a monthly figure is a little trickier than it seems. A month is made up of 4.2 weeks on average, and there are 26 bi-weekly payments in a year.

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You should also always ask what the total price tag of a vehicle is, not simply rely on car payments, Hannah said.

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The catch in 0% financing

There are countless car commercials advertising 0 per cent financing. But that’s generally on offer only for buyers with stellar credit, Hannah said.

“For those of us with a credit score that’s OK, the chance of getting 0 per cent interest is pretty slim,” he added.

And even if you do qualify for no-interest financing, take the time to read the fine print. Often you’ll be expected to buy out your vehicle at the end of any low- or no-interest period. If you don’t have the cash for a lump-sum payment, you’ll have to get another (likely more expensive) loan, Hannah said. In the worst case scenario, you may have to surrender your car.

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Zero per cent financing, however, is a good deal if you can pay off your car in full by the end of the term, Hannah added.

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‘Free’ gifts aren’t actually free

There’s no such thing as a free lunch. If you’ve been promised a flat-screen TV to go with your hot wheels, you can rest assured the cost of your “gift” has been added to your car payments, Hannah said.

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‘No payments’ up front

The same holds for deals with “no payments for 90 days.” No one is shaving three months worth of payments off your bill. You’ll simply pay that balance later, either at the end of the loan or gradually, with a little bit added each month.

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Documentation fees

This is an extra $250 or so that dealerships often add to your final tally to process the paperwork. Basically, you’re being charged for the privilege of paying for your vehicle, Hanna said.

You should refuse to pay the documentation fee. While you may face a significant amount of resistance, dealers can easily dock that cost off your vehicle’s price, Hannah said, adding that he has always been able to avoid the charge.

“Stand your ground. It’s an unnecessary cost.”

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