Are Interest Free Car Loans Legal?
Are Interest Free Car Loans Legal?

Lots of manufacturers and dealers advertise interest-free auto loans — so yes, they’re legal. But it is difficult to qualify for the 0% Annual Percentage Rate (APR). You need excellent credit. You also have to pay other fees, so don’t expect interest-free financing to be free.

How 0% financing works and why it’s legal

When you get a car loan with 0% APR, you pay no interest for the entire term of the loan. It seems too good to be true, but 0% funding is not uncommon.

It is provided through a captive financing company owned by the manufacturer. Manufacturers use these to attract buyers, but only a few are able to qualify.

To make up for lost interest, this type of financing is reserved for new models. Buyers still have to pay other merchant fees such as B. documentation, title and licensing fees. The dealer may also urge you to opt for add-ons, gap coverage or extended warranties. These are optional, so be firm if you don’t want them.


And don’t be afraid to negotiate the total cost. Zero percent financing is only a small part of the car buying process.

How to Qualify for 0% Financing

Each lender has unique eligibility criteria. However, following these guidelines can increase your chances of getting approved:

  • Good credit is the first requirement. Lenders want to make sure you have a near-perfect repayment history and manage your debt before offering you interest-free financing. A credit score of 781 or higher gives you the best financing deal, but if your score is between 661 and 780, you may still qualify for a competitive rate.
  • A regular source of income is also important. Because your loan term may only be 48 months – resulting in large payments – lenders want to know you can afford to pay for the car.
  • You may need a larger deposit. Even though you don’t have to deposit any money to qualify for financing, many lenders still require a huge down payment to get a 0% interest car loan.
  • Lenders also want to have a lower debt-to-income ratio (DTI). A lower DTI confirms that your income is sufficient to pay off this new debt on top of any other payments you may have made.

When to get 0% financing

Interest-free financing is a great option if you’re already planning to buy a new or certified pre-owned vehicle (CPO). Manufacturers don’t usually offer it on the base model, so you’ll have to pay for the extras.


Assuming you’re eligible, you’ll want to negotiate the car price separately from the financing — and come to the dealership with the lender’s financing. So you can calculate exactly how much interest you save with 0% financing.

If you can afford to pay and you know you can save a few thousand dollars on the car you’re considering buying, no-interest financing is the way to go. Otherwise, you should carefully consider it versus other funding options.

Disadvantages of Interest Free Car Loans

Interest-free car loans aren’t always the best way to save. Manufacturers and retailers hope to make up for lost money.

Expect 0% financing only on select models with additional features – and a shorter loan term.


Manufacturers offer term credit through interest-free auto loans. The usual term is 24 to 48 months. Loans with terms of 60 or 72 months are rare.
Since your loan term is shorter, your monthly car payment will be higher. Make sure you can afford the monthly payments.

Discount or bonus funds may not be available. While you don’t pay interest, you may miss out on new car discounts or bonuses. An interest-free loan will not save you money if the total interest is less than the rebate or bonus.

Most interest-free financing is only available for new cars other than the base model. Some manufacturers may also offer it for certified used cars.

Final result

Interest-free financing can be a sure-fire way to save on a new car. If you’re already looking to buy a more expensive model, you can avoid paying thousands of dollars in interest. If you don’t mind higher monthly payments and shorter loan terms, you should make sure you don’t pay more for the car than it’s worth.

However, very few people qualify for an interest-free car loan. Even if you do, you probably won’t save as much from bonus funds or new car discounts. It pays to get financing and calculate the difference between the amount you spend on interest and the amount you save with other options before you start shopping.

So learn more:

Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.