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Are no-interest car loans legit?

Man sits on low bench in the middle of car showroom looking at brochure
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Plenty of manufacturers and dealerships advertise no-interest car loans — so yes, it is legit. But it is extremely difficult to qualify for a 0 percent annual percentage rate (APR). You will also have to pay other fees, so don’t expect no-interest financing to be without cost. 

How 0% financing works and why it is legit 

It may seem like a sketchy, too-good-to-be-true offer, but 0 percent financing isn’t uncommon. Because it’s offered through captive finance companies, which are linked directly to the manufacturer. The manufacturer uses these to draw in buyers, but only a few people can qualify. 

  • Excellent credit is the primary requirement. Lenders want to ensure that you have a near-perfect history of making payments and handling your debt before offering you no-interest financing. 
  • A steady source of income is the secondary requirement. Because your loan term may only be 48 months — resulting in high payments — a lender will want to know you can afford your car payments. 
  • Lenders also want to see a low debt-to-income (DTI) ratio. This is to confirm your income is sufficient to cover your monthly payments.  

To make up for money lost on interest, this type of financing is reserved for new models. Dealerships may also press you to opt for added features, gap insurance or an extended warranty. These are optional, so be firm if you don’t want them. And don’t be afraid to negotiate the total cost. 0 percent financing is just a small portion of the car-buying process. 

When to get 0% financing 

No-interest financing is a good choice if you already plan on buying a new or certified pre-owned (CPO) vehicle. Manufacturers typically don’t offer it on base models, which means you will be paying more than the advertised price.  

Provided you qualify, you’ll want to negotiate the car price separately from the financing — and come to the dealership with financing from a lender. By doing this, you’ll be able to calculate exactly how much you’ll save on interest with 0 percent financing.  

If you can afford the payment and know you’ll save a few thousand on a car you were already planning to buy, no-interest financing is the way to go. Otherwise, consider it carefully alongside other financing options. 

When to avoid a no-interest car loan 

No interest isn’t always the best way to save. Manufacturers and dealerships want to make up for the money they’re losing. Expect 0 percent financing to only be available on select models with added features — and for shorter loan terms. 

  • Manufacturers offer limited loan terms with no-interest car loans. The usual term is 24 to 48 months. Loans of 60 or 72 months are uncommon, and they may even cause you to pay more on your car than it’s worth. 
  • Since your loan term is shorter, your monthly car payment will be higher. Ensure that you can afford the monthly payment.  
  • Rebates or bonus cash may not be available. While you won’t pay anything in interest, you’ll likely be missing out on a new car rebate or bonus cash. If total interest is less than the rebate or bonus cash, a no-interest loan won’t save money. 
  • Most no-interest financing is only for new cars beyond the basic model. Some manufacturers may also offer it on certified pre-owned vehicles, but it varies widely. 

The bottom line 

No-interest financing can be a solid way to save on a new car. If you already have plans to get a pricier model, you can avoid paying a few thousand in interest. And if you don’t mind a higher monthly payment on a shorter loan term, you should be safe from paying more for your car than it is worth.
However, very few people will qualify for a car loan with no interest. Even if you do, you might not save as much as you would get through bonus cash or a new car rebate. It pays to get financing before you start shopping and calculate the difference between what you’ll spend on interest versus what you’ll save with other options.