Auto Finance Guide: Hidden cost of 0% financing?

Nothing could be more enticing than free money, and that's what the current round of zero-percent finance deals seem to offer. Remember the adage, "There's no such thing as a free lunch?'' Well, free money is equally suspicious. There are strings and conditions to nearly all such offers from manufacturers.

Aside from the usual requirement of sparkling credit, there are ways in which zero-percent car loans can trip up a buyer.

Most interest-free financing offers require financing terms of three years or less. So you'll have to shell out some pretty hefty monthly payments if you qualify.

Example: Let's say you're borrowing $20,000 to pay for your new car. With a three-year term at zero-percent interest, your family would have to shell out more than $555 per month in car payments. A five-year term at 3.9 percent with monthly payments of $367.43 may be more manageable, even though you have to pay interest.

If you are financing $20,000 ... then

The loan with 0% will require $555 monthly payment which might be burden on a family earning $3000 per month.

On the other hand 5 years loan at 3.9% APR will require $367.43 monthly payment which is 33% less than the 0% loan and much more manageable for a family. The total interest payment for this loan will be $2054.71.

And some zero-percent offers come with the stipulation that the buyer has to put down as much as 25 percent, whereas most other finance deals can be had with 10 percent or even nothing down, though it's often not wise to cut your down payment to a minimum because it will take longer to build equity.