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Plenty of manufacturers and dealerships advertise no-interest car loans — so yes, they are legit. But it is difficult to qualify for a 0 percent annual percentage rate (APR). You’ll need a great credit score. 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
If you get an auto loan with an APR of 0 percent, you won’t pay interest over the entire loan term. It may seem too good to be true, but 0 percent financing isn’t uncommon.
It’s offered through captive finance companies, which the manufacturer owns. The manufacturer uses these to draw in buyers, but only a few people can qualify.
To make up for money lost on interest, this type of financing is reserved for new models. Buyers still have to pay other dealer fees, such as documentation, title and license fees. 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. Zero percent financing is just a small portion of the car-buying process.
How to qualify for 0% financing
Each lender has unique eligibility criteria. However, meeting these guidelines can strengthen your approval odds:
- 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 credit score of 781 or higher will get you the best deal on financing, but you can still qualify for a competitive interest rate if your score is between 661 and 780.
- A steady source of income is also important. 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.
- You may need a larger down payment. Even if you aren’t required to put money down to qualify for financing, many lenders require a hefty down payment to qualify for a 0 percent interest auto loan.
- Lenders also want to see a low debt-to-income (DTI) ratio. A low DTI confirms your income is sufficient to cover this new debt atop other payments you may be making.
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, so you’ll be paying for extra features.
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 want to buy, no-interest financing is the way to go. Otherwise, consider it carefully alongside other financing options.
Downsides to a no-interest car loan
A no-interest car loan 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.
- 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.
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 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.