According to Experian data for the first quarter of 2022, the average monthly payment is nearly $650 for a new car and about $500 for a used car, so finding a bargain is critical. Signing up for a 0% APR auto deal is one way to save money on your next car purchase.
Many automakers offer interest-free auto loans to attract new qualified customers and sell more vehicles. However, you should always exercise caution when buying a new car, even if the APR quote on the table is zero. In some cases, it may be better in the long run to get a car loan from an outside lender.
What is 0% APR?
A 0% APR or interest-free auto deal basically means you borrow money for free. Your monthly payment repays the money the lender pays the auto dealer, but the extra money in your pocket doesn’t go into the lender’s bank account.
This is different from the usual approach when taking out a car loan, where the lender charges you interest on the financing. After all, interest and fees are the primary way lenders make money. When you repay the loan, you will repay the money that the lender paid the auto dealer on your behalf. The interest you pay helps the lender make a profit.
How does 0% APR work?
Financing a car without interest sounds too good to be true. But these financing offers are tools automakers can use to sell more vehicles.
Lenders offering 0% financing are known as captive finance companies and have ties to the automakers themselves. Some examples of captive lenders include Ford Motor Credit, General Financial, Nissan Financial, Toyota Financial Services, etc. So if Ford wanted to sell more F-150s because of excess inventory, it could offer zero-year interest loans to select borrowers through its own financing arm.
On the surface, interest-free financing may seem cheaper, but this is not always the case. When automakers offer 0% financing, they may try to make up for “lost” revenue in other ways. For example, a dealer may try to sell you additional products, such as extended warranties or vehicle clearance insurance. You may also have to give up perks such as discounts that typically lower the purchase price.
How to get a car quote with 0% APR
Zero percent financing is generally reserved for borrowers with good credit ratings – typically classified as having a credit rating of 800 and above. Before you start financing your car purchase, you should check your credit report yourself. Each lender also has its own definition of excellent credit, and eligibility requirements may vary by vehicle.
Since the zero-year APR eligibility criteria vary widely, it is best to call the car dealer in advance. Ask what criteria you need to meet to qualify for interest-free financing on a specific vehicle. In addition to your credit history, auto lenders may consider other factors when considering your application, such as:
- Debt-to-income ratio.
- Work experience.
- Income and address verification.
Regardless of the status of your credit history — good, bad, fair or excellent — you should also take the time to get pre-approval from outside funding sources. Pre-approval can help you compare your options and give you a backup plan if you don’t qualify for the automaker’s exclusive offers.
0% APR Financing Restrictions
For some borrowers, interest-free financing can be a big deal. Still, there are some potential pitfalls to be aware of when considering this type of funding.
- Limited options: Interest-free financing may only be available for certain vehicle types. First, the car you buy is almost certainly new. Automakers also tend to reserve special financing deals for models with excess inventory that need to be moved.
- Limited repayment options: Depending on the offer, your repayment options may be limited by 0% financing. It usually takes less time for you to repay the loan than otherwise. Of course, there’s nothing wrong with paying off your loan quickly, but you should make sure you can afford the higher monthly interest rate without straining your budget.
0% Funding and Bonuses
Automakers want you to buy your next car from their company, not a competitor. This is the main reason why there are no 0% funding proposals at all. To attract new customers, automakers often offer buyers cash-back bonuses.
Unfortunately, automakers may not allow you to take advantage of both 0% financing and bonuses. If you’re facing this dilemma, you have to decide which way to save is better.
Interest Rate Tip: Use the Auto Finance Calculator to help you compare 0% Finance vs. Bonus Cash Rewards. Sometimes, in terms of overall savings, it makes the most sense to get a cash rebate from a car dealership along with a higher APR. In other cases, 0% of funds may be the clear winner.
Should you take the money and refinance?
You may need to accept standard financing from the automaker’s captive lender to be eligible for certain types of cash incentives. In return, you have the potential to get a higher interest rate than your bank or outside lender.
Depending on your circumstances, refinancing your new car loan within a few months can be an effective strategy. But there are some downsides to consider first. That’s because if you take out two auto loans in a row — the original one and the one you’re refinancing — it can damage your credit for a while.
Multiple loans will result in at least two hard credit inquiries on your credit report. Adding two loans to your credit report, even if one is paying off the other, can reduce the average age of accounts on your credit report. In terms of credit rating, the higher the average age of your account, the better.
When is 0% APR trading not worth it?
In the following cases, it may make sense to waive the manufacturer’s special financing offers.
The repayment terms do not meet your budget
Low-interest car loans typically have shorter financing terms. Depending on your income, shorter loan terms may make your monthly payments too high.
For example, if a 0% car loan takes 4 years and you would normally finance 5 years, the cost difference may be meaningful. With a 4-year, $25,000 auto loan from the manufacturer, your monthly repayments are about $520. By comparison, taking out a $25,000 auto loan over 5 years at 4% would cost $460 a month. You can use a car loan calculator to calculate your potential loan.
Financial experts often recommend capping your monthly vehicle payments to 20% or less of your monthly salary. Some experts recommend that you limit car payments to 10% of your gross income.
You would love to buy a more expensive car
You shouldn’t decide to increase your car budget just to qualify for special financing. If you’re going to pay $10,000 in cash for a used car, getting a $30,000 new car loan just to take advantage of interest-free financing may not be a smart financial move.
Cash rebates let you save even more
Cash back rebates are generally not available to buyers who take advantage of the manufacturer’s special financing. 0% financing won’t be worth it if you’re crunching the numbers and cash rebates give you greater savings opportunities.
Imagine being able to enjoy $4,750 in cash back on your new car purchase. For a $30,000 new car, this incentive can bring your purchase price down to $25,250. If you finance $25,250 at 4% for 5 years, you will pay $2,651 in interest. In this case, your total cost is $27,901 – as long as you don’t add extra products such as extended warranties or other financing charges.
Alternatively, you can pay the full purchase price of $30,000 and choose 0% APR. In this case, assuming no add-on products or fees, you’ll still pay $2,099 more than you would have received in cash rebates.
Notes on 0% APR Offer
These considerations can help guide the process as you evaluate your options and decide that a 0% APR auto loan is the right choice for you.
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Final result
The key to deciding if a 0% APR car deal is right for you is to compare it to an outside lender’s car loan and determine your true monthly cost. Depending on your situation, this deal may not actually save you any money. In some cases, special financing is not as good as it seems, and excellent credit is often required to qualify. Check current auto loan interest rates and make sure an interest-free loan won’t cost you more.
