Many manufacturers and dealerships advertise interest-free car loans – so yes, it’s legit. But it is extremely difficult to qualify for an annual percentage rate (APR) of 0%. You’ll also have to pay other fees, so don’t expect interest-free financing to be cost-free.
How 0% Financing Works and Why It’s Legit
It may seem like a sketchy offer, too good to be true, but 0% financing is not uncommon. Because it is offered through captive finance companies, which are directly tied to the manufacturer. The manufacturer uses them to attract buyers, but only a few people can qualify.
- Excellent credit is the main requirement. Lenders want to make sure you have a near-perfect history of paying and managing your debts before offering you interest-free financing.
- A steady source of income is the secondary requirement. Since your loan term may only be 48 months, resulting in high payments, a lender will want to know that you can afford your car payments.
- Lenders also want to see a low debt-to-income ratio (DTI). This is to confirm that your income is sufficient to cover your monthly payments.
To make up for the money lost on interest, this type of financing is reserved for new models. Dealers may also pressure you to opt for additional features, gap insurance or 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% financing is only a small part of the car buying process.
When to get 0% financing
Interest-free financing is a good choice if you are already planning to purchase a new or Certified Pre-Owned (CPO) vehicle. Manufacturers usually don’t offer it on base models, which means you’ll pay more than the advertised price.
If you qualify, you will want negotiate the price of the car separately from financing — and come to the dealership with financing from a lender. By doing this, you will be able to calculate exactly how much you will save on interest with 0% financing.
If you can afford the payment and know you’ll save a few thousand dollars on a car you were already planning to buy, interest-free financing is the way to go. If not, consider it carefully with other financing options.
When to avoid an interest-free car loan
No interest is not always the best way to save. Manufacturers and dealers want to make up for the money they are losing. Expect 0% financing to only be available on select models with additional features – and for shorter loan terms.
- Manufacturers offer limited loan terms with interest-free car loans. The usual duration is 24 to 48 months. Loans of 60 or 72 months are rare and can even lead you to pay more on your car what it’s worth.
- Because your loan term is shorter, your the monthly car payment will be higher. Make sure you can afford the monthly payment.
- Cash rebates or bonuses may not be available. Even though you won’t pay anything in interest, you’ll probably miss a rebate or cash bonus on a new car. If the total interest is less than the discount or cash bonus, an interest-free loan won’t save you money.
- Most interest-free financing is only for new cars beyond the base model. Some manufacturers may also offer it on Certified Pre-Owned vehicles, but this varies widely.
The bottom line
Interest-free financing can be a great way to save on a new car. If you are already planning on getting a more expensive 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 sure you’re not paying more for your car than it’s worth.
However, very few people will qualify for an interest-free car loan. Even if you do, you might not save as much as you would get from a cash bonus or a discount on a new car. It pays to secure financing before you start shopping and calculate the difference between what you’ll spend on interest and what you’ll save with other options.