Zero per cent financing is an interest-free loan. Automobile companies with financing divisions, like Honda's American Honda Financing Corporation or General Motors' GMAC wings, use the tactic to attract buyers to purchase an automobile. Typically, it is offered as a promotion to clear out old models or amplify an otherwise slow sales period. The loans run for a term measured in months over which no interest is assessed.
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What is paid and how is the payment determined?
A buyer who qualifies for zero per cent financing makes a monthly payment that is based on the grand total of the purchase, divided by the term of the loan. For instance, if a car costs £15,600 and the term of the loan is 48 months, then the buyer pays £325 per month.
As is the case with any loan, the buyer must make a monthly payment. In this scenario though, the payment is applied to the principle as no interest is assessed.
Who qualifies for zero per cent financing?
When automakers advertise zero per cent financing, the words "well-qualified buyers" is often mentioned. The determination of an interest rate is directly linked to the buyer's credit score--the higher the credit score, the lower the rate. A "well-qualified buyer" will often have a credit score of 800 or higher.
Credit scores are determined by the individual buyer's credit history. The three major credit bureaus review payment histories, debt to credit limit ratios, credit balances and other factors, and then assign a number to the person. This number relates to the person's creditworthiness and whether that person is considered a risk. These numbers are reported to the Fair Isaac Corporation (FICO), which takes the information and issues a FICO score. This is the score that is used in determining if a buyer qualifies for automobile financing and at which rate.
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