The Realities of 0% Financing

We have seen the prevalence of 0% financing for the purchase of new cars. Let us consider its effect on consumers who buy new cars and trade in their used cars, as explained by Karen Lundegaard in her recent article in the Wall Street Journal. The automobile manufacturers focus on selling new cars. Recently, one of the major incentives that they are offering to prospective buyers is "0 % financing." What are the implications of this tactic for consumers, the banks and finance companies that finance automobile sales, and the automobile industry? When automobile dealers sell new cars, they usually take used cars as trade-ins. Therefore, as new car sales rise, so does the glut of used cars acquired through trade-ins. In turn, the glut causes a decline in the market value of used cars. The table below provides a few examples taken from her article.

Source: Edmunds

Because of the sharp decline in the prices of used cars, many consumers are finding that they owe more on their trade-ins than they are worth in the market. Attractive as 0% financing might be, they are "upside down" on their trade-ins. In a sense, what consumers save on 0% financing, they lose on the value of their trade-ins. As the famed British economist, Adam Smith, once observed, "There is no such thing as a free lunch."