Zero Percent Financing: A Consumer Benefit Or A Marketing Trick?

In recent years, zero percent financing has become an increasingly popular financing option offered by most car manufacturers on new cars and trucks. While it does sound great and is extremely appealing to many car buyers, there are few things attached to it that may diminish the benefits.

Commonly, car dealers offer an alternative of a zero percent financing or a cash rebate on the vehicle purchase price. Let us say, that you are confronted with an offer of getting a cash rebate of $3,000 or a zero percent financing. While you are going to have no interest to pay, you will end up paying $3,000 more for a vehicle that you may have saved otherwise. Should you pay off your loan early, the advantage of taking zero percent financing would become null.

It is important to keep in mind that any car is a quickly depreciating asset. Taking a rebate instead of a zero percent financing incentive may help you to reduce the gap between the loan balance and the vehicle fair market value. Since your car depreciates most in the first year of use, having it totaled or stolen may leave you upside down on your zero percent auto loan since your insurance company would not cover extra $3,000 you paid for your vehicle. That means that you would have to come up with the difference to cover the remaining loan balance.

It is important to remember that nothing is truly free in this life. Financing incentives, typically coming from the corporate offices of car manufacturers, are most commonly hidden in the vehicle selling price. Car dealers, sometimes offering zero percent financing on their own, follow the same strategy.

How Does It Work?

While it is somewhat understandable how financing incentives offered by auto manufacturers work, zero percent financing offered solely by a dealer may raise your eyebrows. Obviously, banks are not going to finance you at no interest, no matter how good your credit is, since they have to make money off you to stay in business.

What usually happens is that auto dealers rebate the bank upfront for the interest charges that a customer would accrue and pay to the bank otherwise. In simple terms, your dealer pays your interest for you. Since they are not going to make it a money-losing proposition, they have to compensate these expenses somehow. That is why these costs are built into the vehicle purchase price.

Typically they are offset by a rebate that a car manufacturer would give you on a new car purchase and/or an incentive that an automaker gives a dealer for higher volume sales. What this also means to you that there is less negotiation power on your side, since a dealer would be less eager to go down on a vehicle price in this case.

Financing Incentive or a Cash Rebate?

What this means to you is that a simple mathematical equation needs to be solved. When approached with a choice between the rebate and a zero percent financing, calculate how much interest you would normally pay on a car loan and compare it to the amount of rebate. If your interest charges are going to be greater, it may be time to consider zero percent financing. Should they be not, take the rebate and run away from the zero interest deal!

Auto Repossession Before Bankruptcy

The other day I received a call where an individual asked me whether filing bankruptcy would allow for a car that has been repossessed to be returned. Although my response probably failed to satisfy the caller (the usual attorney response of it depends), here is what is required in California (at least how the courts have viewed the law).

Background

In most vehicle contracts the lender retains a right to repossess a vehicle if the borrower fails to make the scheduled payments. With many contracts, this repossession can be done outside of any court proceedings.

However, once an individual files for bankruptcy many of the rules change. For one, an automatic stay is implemented. This stay prevents most actions against the debtor (individual that files for bankruptcy). Specifically, the automatic stay strictly prohibits any lawsuit or repossession against a debtor that is delinquent on car loan payments. Any repossession after a bankruptcy petition is filed constitutes a violation of the automatic stay, with the repossession void and of no effect. In that case, the lender would be immediately required to return the vehicle to the debtor.

Effect of Bankruptcy on Prepetition Repossession

Section 542 of the Bankruptcy Code requires that entities in possession of “property of the bankruptcy estate” are generally required to turn the property over to either the trustee (in Chapter 7) or the debtor (in Chapter 13). This big sticking point then for this turnover requirement is determining what is “property of the estate.”

Section 541 of the Bankruptcy Code defines property of the estate. This definition includes “all legal or equitable interests of the debtor in possession as of the commencement of the case.” Basically this definition states that whatever rights the debtor has at the commencement of the case continue in bankruptcy. As for the vehicle that has been repossessed, the court has to discover what rights a debtor had when the bankruptcy case was filed.

These rights are determine by state law (California State law). Under the California Civil Code (section 2983.2), a debtor has the right to redeem a repossessed vehicle up until the date the car is sold by the repossessing lender.

Two recent cases have come to different conclusions as to whether turnover of the vehicle is required upon the filing of the bankruptcy petition. First, in a case from the Southern District of California (In re: Fitch, 1998), the bankruptcy court held that while a repossessed car is property of the estate, the right to possess the car was transferred to the lender prior to the filing of the bankruptcy petition. The court interpreted the statutes to mean that the automatic stay freezes the positions of the debtor and creditors. Thus, the lender had the right to maintain possession. The court did state that a vehicle could be returned to a debtor upon the debtor’s giving of adequate protection. In most cases adequate protection means the establishing of proof of insurance and proof that the debtor will be able to make the regular payments on the car.

In the Northern District of California (In re: Cortez, 2010), the Bankruptcy Court interpreted the Bankruptcy Code, and specifically the section on the automatic stay, to mean that a “knowing retention of estate property violates… the automatic stay.” Because a debtor has the right to redeem until the date of a sale by the lender, the vehicle remains part of the estate, and subject to turnover. In this case, the debtor provided adequate protection to the secured creditor. However, the court seemed to say that it was not necessary for turnover.

What to do?

If your car has been repossessed, and you want to make sure you retain possession, bankruptcy may be a solution if you are not able to pay the balance before a lender’s sale. However, while the Northern District seemed to state that adequate assurance is not necessary for turnover, it will ultimately be necessary to avoid a lender’s motion for relief from the automatic stay. Be prepared to show (a) insurance, (b) regular and sufficient income, and (c) an ability to pay for the vehicle.

Car Loans – Bad Credit – No Problem

If you are looking for car loans with bad credit, it may be no problem. Most people do not believe you can get car loans with bad credit but this is not always the case. There are several dealerships or auto consultants who specialize in getting car loans for people with bad credit.

If you are in the need for a car loan and have bad credit here are some tidbits that may be helpful to you.

Since not every dealership offers special financing you may want to start by doing a little homework. You can do a search on line for local dealerships or auto consultants who have special finance departments. Another route may be to ask friends and family if they have had a similar need for car loans with bad credit.

The key is to find a car dealership or auto consultant who truly cares about you and your situation. There are some salespeople out there that may consider special financing a troublesome situation and these may be the people you want to avoid.

Look for a salesperson that treats you with respect and shows enthusiasm toward finding you a car loan despite your bad credit. Let’s face it, bad credit is already stressful to those that carry a low credit score. There is no need to further the agony as you search for a car loan under bad credit circumstances.

Furthermore, a car loan may be the perfect answer to helping you improve your credit score. By securing a loan for a car and faithfully making the loan payments on time every month, you can begin the climb toward raising your credit score.

By utilizing a car loan through a trusted dealership or auto consultant you can create a win/win situation. In addition to improving your credit rating, you will get a set of trustworthy wheels to take you around town.

This leads to the next tidbit – a trustworthy car. Many establishments that offer car loans to those with bad credit have a nice inventory of late model cars with lower mileage. A quality special finance department will have the car inspected for the engine’s performance along with a safety inspection to assure you have a quality car that is safe for your family.

When you go to shop for a quality car loan with bad credit, bring the necessary paperwork with you, this will help you to get pre-approved. You will need a current driver’s license and proof of insurance. In addition, you will need a couple of your check stubs for proof of income. You may be asked to provide proof of residency with a utility bill and your cell phone bill. This will help you in getting pre-approved.

Being pre-approved will allow the special finance person to begin looking for your perfect car loan despite your bad credit.