With the average monthly payment for new cars close to $680 and used around $515, according to Experian data from the second quarter of 2022, finding a bargain is top of mind. And signing off on a 0 percent APR car deal is one way to save money on your next car purchase.
Numerous automakers offer interest-free auto loans to attract new, well-qualified customers and sell more vehicles. However, when shopping for a new vehicle, you should always proceed with caution, even if a zero APR offer is on the table. In some instances, getting an auto loan from an outside lender might work out better in the long run.
What is a 0% APR?
A 0 percent APR or interest-free auto deal essentially means you borrow money for free. Your monthly payments reimburse the lender for the money it paid the auto dealer, but no extra money from your pocket goes into the lender’s bank account.
This differs from the usual approach when you take out a vehicle loan where the lender charges you interest in exchange for financing. Interest and fees, after all, are the primary ways that lenders make money. As you repay the loan, you reimburse the lender for the money it paid the auto dealer on your behalf. The interest you pay helps the lender earn a profit.
How does 0% APR work?
Financing a car interest-free almost sounds too good to be true. But these financing deals are a tool that auto manufacturers can use to sell more vehicles.
Lenders that offer 0 percent financing are known as captive finance companies and are linked to the auto manufacturers themselves. Some examples of captive lenders include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. So, if Ford wants to sell more F-150s due to overstock issues, it might offer zero APR loans to select borrowers through its own financing arm.
No-interest financing seems more affordable on the surface, but that’s not always the case. When auto manufacturers offer 0 percent financing, they may try to make up for “lost” income in other ways. For example, a dealership may push hard to sell you add-on products, like extended warranties or gap insurance, with your vehicle. You also might have to forgo benefits like rebates that would normally bring down your purchase price.
How to qualify for a 0% APR car deal
Zero percent financing deals are generally reserved for borrowers with excellent credit — typically classified as a credit score of 800 and above. You’ll want to review your credit reports on your own before you start shopping for auto financing. Each lender also has its own definition of excellent credit, and qualification requirements could vary from vehicle to vehicle.
Because zero APR qualification standards vary so widely, your best bet is to call the auto dealership in advance. Ask what criteria you need to meet to qualify for interest-free financing on a specific vehicle. Aside from your credit score, an auto lender may consider additional factors when it reviews your application, such as:
- Debt-to-income ratio.
- Employment history.
- Income and address verification.
Regardless of the condition of your credit — good, bad, fair or excellent — you should take the time to seek preapproval from outside financing sources as well. Preapproval can help you compare your options and give you a backup plan if you don’t qualify for the automaker’s exclusive offer.
Limits of 0% APR financing
Interest-free financing might be a great deal for some borrowers. Still, there are a few potential pitfalls you should look out for when considering this type of financing.
- Limited selection: Interest-free financing may only be available for certain types of vehicles. First, the car you purchase will almost certainly need to be new. Auto manufacturers also tend to reserve special financing offers for vehicle models where there’s a surplus in stock that they need to move.
- Limited repayment options: Depending on the offer, your repayment options with 0 percent financing may be more limited. Often, you’ll have less time to repay the loan than you might have otherwise. Of course, there’s nothing wrong with repaying a loan quickly, but you should be sure that you can afford the higher monthly payment without straining your budget.
0% financing vs. bonus cash
Automakers want you to purchase your next vehicle from their company, not a competitor. This is a key reason 0 percent financing offers exist in the first place. In the same interest of attracting new customers, auto manufacturers often offer bonus cash rebates to buyers.
Sadly, an auto manufacturer might not let you take advantage of both 0 percent financing and bonus cash. If you’re faced with this dilemma, you’ll have to decide which savings opportunity is the better deal.
Bankrate tip: Using an auto finance calculator can help you compare apples to oranges when it comes to 0 percent financing versus bonus cash incentives. Sometimes taking the cash rebate an auto dealer offers along with a higher loan APR will make the most sense as far as overall savings. In other instances, 0 percent financing might be the clear winner.
Should you take the cash and refinance later?
You might have to accept standard financing through the automaker’s captive lender to qualify for certain types of cash incentives. In exchange, there’s a chance that you’ll receive a higher interest rate than you might through your bank or an outside lender.
Depending on your situation, refinancing your new auto loan in a few months might be an effective strategy. But there are some downsides to consider first. Namely, taking out two auto loans back-to-back — the original and the one you refinance it with — could harm your credit for a while.
Multiple loans will result in at least two hard credit inquiries on your credit reports. Adding two loans to your credit reports, even though one pays off the other, can reduce the average age of accounts on your credit reports. In terms of credit scoring, the older the average age of your accounts, the better.
When is a 0% APR deal not worth it?
It might make sense to forgo special manufacturer financing offers in the following situations.
The repayment terms don’t fit your budget
Low-interest car loans often come with shorter finance terms. Depending on your income, a shorter loan term could make your monthly payment unaffordable.
For example, if the 0 percent car loan lasts for four years in instances when you would typically finance for five years, the cost difference can be meaningful. On a $25,000 car loan through the manufacturer for four years, your monthly payment would be about $520. By comparison, a $25,000 car loan financed over five years at a 4 percent interest rate would feature a monthly payment of $460. You can use an auto loan calculator to do the math for your prospective loan.
Financial experts often recommend keeping your monthly vehicle payment to 20 percent or less of your monthly take home pay. And some experts suggest that you cap your car payments at 10 percent of your gross income.
You’re tempted to purchase a more expensive vehicle
You shouldn’t decide to increase your auto budget just to qualify for special financing. If you were planning to pay $10,000 cash for a pre-owned vehicle, taking on a new auto loan with a $30,000 price tag just to take advantage of no-interest financing probably isn’t a wise financial move.
Cash rebates offer you more savings
Cash-back rebates often don’t apply to buyers who use the manufacturer’s special financing. If you crunch the numbers and cash rebates offer you a bigger savings opportunity, a 0 percent financing deal wouldn’t be worth it.
Imagine you can take advantage of a $4,750 cash back offer on a new vehicle purchase. On a new vehicle with a $30,000 price tag, that incentive could bring your purchase price down to $25,250. If you financed $25,250 at a 4 percent interest rate for five years, you’d pay $2,651 in interest. In that scenario, your total cost would be $27,901 — as long as you didn’t add on extra products like extended warranties or incur any other financing fees.
Alternatively, you could pay the full $30,000 purchase price and opt for a 0 percent APR. Assuming no add-on products or fees, you’d still pay $2,099 more in this scenario than you’d pay by taking the cash rebate.
Do’s and don’ts of 0% APR deals
If you review your options and decide that a 0 percent APR auto loan is the right choice for you, these do’s and don’ts may help you navigate the process.
The bottom line
The key to deciding if a 0 percent APR car deal is worth it for you is to compare it against an auto loan from an outside lender and find your true monthly cost. Depending on your circumstance, the deal may not truly save you money. There are also a few situations where special financing isn’t as good as it seems and qualifying often requires excellent credit. Check current auto loan rates and make sure interest-free won’t end up costing you more overall.