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What’s the Catch With Zero Percent Financing Car Loans?


If you’re interested in buying a car, you’ve probably seen a lot of low-interest special offers and incentives from automakers. Many brands offer 0% APR interest, which suggests that you can finance a car and pay no interest over the loan term.

However, is 0% financing too good to be true?

What Does 0% Financing Mean?

When you take out a car loan, you’re borrowing money to pay for a car, and that much is obvious. But the bank doesn’t give you that money for free. Instead, you pay interest and fees to the bank for lending you the money.

A 0% car loan is car financing where you pay no interest. You borrow money from a bank but pay nothing extra for the privilege of doing so. Essentially, paying zero interest gives you the chance to pay the same amount of money as a cash buyer, even though you’re spreading your payments over a longer term.

How Do 0% Car Deals Work?

Since you’re not giving the bank any incentive to lend you money, you might be wondering just how it’s possible to get a 0% car deal? The answer comes down to this: It usually isn’t the bank doing the lending but rather the automaker itself. It’s called captive lending.

That’s why you often see Ford Credit, Honda Financial Services, GM Financial, and others offering to finance a vehicle at the dealership.

The way an automaker makes money with a 0% deal is simple: The money does not get made on financing but rather the car itself. Dealers will try to sell you extras to make up the difference, including extended warranties for your vehicle.

Also, the cost of financing gets built into the price of the car. If you obtain a 0% financing car deal, you likely will not get any other incentives on top of that. And that means the automaker still pockets a nice profit on the sale of the car despite not making any profit on the financing.

If you have the cash to buy a car outright, you might be better off taking advantage of bonus cash incentives rather than 0% financing.

Is it a Scam?

Zero percent car deals aren’t usually a scam. However, the deals can often be challenging to qualify for, and that’s where many shoppers run into disappointment. For example, automakers or dealers will often advertise 0% interest, even when it’s only available to shoppers with long credit histories and the absolute highest credit scores.

Buyers with excellent credit scores are likely to make every payment on time for the life of the loan and maybe even pay it off early, which makes it worth it for the automaker to offer 0% financing. Car finance companies and banks face less risk when a borrower’s credit history looks excellent.

When shoppers with only average or poor credit histories reach the dealership, they find out that they don’t qualify. That’s when buyers find out about a higher interest rate that will earn more money for a dealer or an automaker.

Dealers use 0% financing to get people into the showroom. We don’t consider this a bait-and-switch scheme since the 0% offer is technically sound. But we do suggest that you check your credit score before heading to a dealership. That way, you will know if you qualify for a loan with 0% financing.

How to Obtain a Free Credit Report

To find out your credit score to see if you qualify for 0% financing, check your credit score with all or any of the three credit reporting bureaus: Experian, Equifax, and TransUnion.

By law, consumers can obtain free credit reports once a year. According to the federal government, the official website to get your free credit report is AnnualCreditReport.com. Due to the COVID-19 pandemic, the credit reporting bureaus began offering free monthly credit reports.

Understanding Your Credit Score

FICO scores, or those created by the Fair Isaac Corporation, range between 300 to 850. Typically, lenders look for a score of 800 or above for 0% car loan offers.

According to Experian, most consumers’ credit scores fall between 600 and 750. In 2020, the average FICO score in the United States reached 710. That represents a 7 point increase since 2019.

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Excellent: 800-850

When is 0% a Good Deal?

Zero percent financing is a good deal if you can afford the loan.

It’s also a good deal if you had your eye out for a new car for a while, your credit score looks excellent, you crunched the numbers in your budget to figure out a monthly car payment you can afford, and the perfect 0% financing deal came up for a car on your shopping list.

Like with any financial commitment, it’s always good to do your homework ahead of time to avoid buying a car and taking on debt on an impulse. That is a recipe for buyer’s remorse, and you could get stuck hating your new vehicle and hating your new loan even more.

If you’ve been planning for a new car purchase and found a 0% financing deal that you qualify for and is friendly to your budget, it’s an excellent way to borrow money with no interest.

Shop for a New Car

When to Avoid 0% Financing

Zero percent financing is a bad deal if you can’t afford the loan. If you want to buy a new car just because a 0% financing deal seems too good to pass up, you may want to pause and reconsider.

Were you even looking for a new car, or did you come across a great financing deal and get car fever? Even if you don’t pay any interest on the loan, can you make the monthly payments work within your budget? Are you comfortable with the risk involved with financing a car rather than owning it outright?

Any new car shopper needs to consider all of these questions. In other words, don’t rush into a car loan that you can’t afford just because of an attractive 0% offer. Automakers run deals like these all the time. So there’s nothing wrong with taking your time to give some extra thought and planning for your next car purchase.

Another thing to keep in mind: What can you afford as a down payment? If you get 0% financing on a new car loan but make a low down payment, then you’ll be upside down on your new vehicle (owing more on it than it’s worth) the second you drive it off of the lot, and your new car becomes a used car.

Being upside down on a car is never a good thing, and it can mean you need gap insurance. This more expensive coverage pays the difference on what you owe versus what a car is worth after depreciation if the vehicle gets totaled. A good rule of thumb is to put at least a 20% down payment on a vehicle to avoid financial insecurity.

Another way that 0% financing can be a bad deal is if it’s just too long of a loan. Typical car loan terms range from 3 to 5 years. Sometimes these deals stretch out for 72 months or six years. Six years is a lot of time to spend paying for a car, no matter how good the monthly payment seems.

What if you need to downsize or buy a bigger car, but you still owe money on a car you bought because of a great financing deal? The shorter the term and the higher your monthly payment, the sooner you’ll own your vehicle. Owning your car is the most financially secure position to be in with your vehicle.

How to Get 0% Auto Financing

If your credit is excellent, you will qualify for a 0% interest rate. However, you will need to confirm that the rate is available for you at the dealership if your credit score shows up below 800 on your report.

  1. Negotiate the best deal first. Before you show your hand on financing, take the car on a test drive and negotiate the best deal on the vehicle.
  2. Find out if you qualify. At this point, the dealer will look at your credit history to see if you qualify for 0% financing. There is no specific credit score set in stone that determines whether you qualify for 0% financing. But generally, a credit score of around 740 or higher can help you obtain the lowest interest rate like 0% financing.
  3. Be willing to back out of the deal. If the dealer explains that you can’t obtain the loan at 0% financing, you shouldn’t necessarily back out on the deal. But you might consider whether you’re comfortable with the new rate the dealer presents to you instead. If it’s too high for your liking, remember you can check other options.
  4. Look at other dealerships. You can always consider buying a car from a different dealership. You can also go to the dealership prepared with a credit union or bank financing deal to use as a negotiation point if needed.

The Bottom Line

Zero percent car financing is an excellent incentive for qualified shoppers already in the market for a new car. A 0% financing deal shouldn’t be the sole determining factor in your new car purchase. If you’ve done all the proper planning for your new car purchase and you find a 0% deal on a loan that works with your budget, it’s a great way to save money on car loan interest.

Related Car Financing Articles:

Editor’s Note: Autotrader updated this article for accuracy since it was originally published.

FAQ

What is 0 Financing on New Cars?

When you see 0% financing on new cars, qualified buyers of this type of loan will pay no interest.

What Does 0 APR Mean When Buying a Car?

The term 0% APR refers to the annual percentage rate on a loan when you buy a car and qualify for this interest rate.

Is 0 Financing a Good Deal?

Zero percent financing can be a good deal if you plan to buy a car anyway and you can afford the loan, plus your credit score looks excellent. It’s a great way to borrow money with no interest.

 

Doug Demuro
Doug Demuro
Doug DeMuro writes articles and makes videos, mainly about cars. Doug was born in Denver, Colorado, and received an economics degree from Emory University in Atlanta. After graduation, Doug spent three years working for Porsche Cars North America. Eventually, he quit his job to become a writer, largely because it meant that he no longer had to wear pants. Doug’s work has been featured in a... Read More about Doug Demuro

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40 COMMENTS
  1. There are a few things to keep in mind when financing.  Never tell the dealership how you plan to pay.  Negotiate up front and get the best deal.  Don’t let them know you have a trade in either, and it at all possible, sell your vehicle yourself to get the best return.  My husband and I won’t buy a car unless we know that we can pay it off quicker if we wanted to.  Be smart about how much car you can afford. Sometimes, it’s not wise to buy a new car if you know you will trade later.  You can end up upside down on your value/payments.  Do your research.  There are a handful of cars/trucks/suvs that do hold their year to year value with average miles driven.  It’s all about research and budget.  Do not let anyone run your credit until you’ve done due diligence on what they will accept and if it’s really what you want. I have seen too many people jump into buying a car because they “fell in love with it” but don’t know anything about it other than it looked nice and was fun to drive.  There are a lot of comments on here that are negative, but sometimes, it can be worth the debt if you travel a lot for work and need the dependably.  Again, don’t go to a dealership until you know what you need the car for, how much you can afford (take into account interest, taxes and insurance), and the pros/cons of the vehicles. For certain people,72 months 0% is a great deal. For others, it might be best to go another route.  …..Research, research, plan……

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