0% APR car deals: Are they worth it? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering interactive tools and financial calculators, publishing original and objective content. We also allow you to conduct research and compare data for free - so that you can make sound financial decisions. Bankrate has agreements with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that are featured on this site are from companies that pay us. This compensation may impact how and where products appear on the site, such as, for example, the order in which they may appear in the listing categories, except where prohibited by law. Our mortgage, home equity and other home lending products. This compensation, however, does have no impact on the information we publish, or the reviews you see on this site. We do not contain the vast array of companies or financial offerings that could be accessible to you. @VeraNovember/Twenty20
6 min read Published March 02, 2023
Writer: Michelle Black Michelle Black Written by Contributing writer Michelle Lambright Black is a credit expert with more than 19 years' experience, an author on a freelance basis and an accredited credit expert witness. In addition to writing for Bankrate Michelle's work has been featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader's Digest, among others. Edited by Rhys Subitch Edited by Auto loans Editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances with concise, well-researched and accurate information that breaks down complicated subjects into bite-sized pieces. The Bankrate guarantee
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They're worthwhile if you are able to lower your monthly payment. However, you must have an excellent credit score to qualify. Make sure you keep the cost-effectiveness of your loan and your eligibility in mind while taking a test drive.
What exactly is 0% APR? A 0 percent APR or basically means that you can borrow money for free. The monthly installments you pay back your lender for the amount that it paid to the dealer, however no additional cash from your pockets goes directly into your loan's bank account. This is different from the standard way of doing business, where the lender is charged to finance. The fees and interest are, in fact, the main ways that lenders earn money. Here's an illustration of the difference in monthly cost a 0 percent APR could make versus an APR that is more typical. Average rate
0% APR
Amount to be financed
$27,564
$27,564
A loan term
60 months
60 months
APR
5.47%
0%
Monthly payment
$478
$418
Total cost
$28,704
$25,064
What is 0% APR and how does it work? A car loan that is interest-free sounds too good to be true. However, these financing deals are a tool that manufacturers of automobiles can utilize to increase sales of their vehicles. Lenders that offer 0 percent financing are called captive finance firms and are connected to . A few examples of captive lenders include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. If Ford is looking to increase sales of its F-150s to address overstock issues, it might offer zero-interest loans to select borrowers through its own financing arm. No-interest financing seems more affordable on the surface however, that's not always the situation. If automakers offer zero per cent financing, they may try to make up for "lost" income in other ways. For instance, a dealer may try to get you on the spot or using your car. It is also possible to forfeit benefits such as rebates which would typically lower your purchase cost. What are the criteria to be considered for an 0% APR vehicle deal? Zero percent financing offers typically only available to borrowers with excellent credit -- typically classified as a credit score that is 800 and over. You should do this prior to when you start shopping for auto financing. Every lender also has their own definition of what constitutes excellent credit and its qualification requirements may differ from vehicle to vehicle. Because the zero APR requirements for qualifying vary so widely it is best to call the auto dealership in advance. You can inquire about the criteria you will need to meet to qualify for an interest-free loan on a particular vehicle. Aside from your credit score the auto lender may consider additional factors when it reviews your application, such as: . Employment record. Income and address verification. No matter the state of your credit -- good, bad, fair or excellent -- it is important to seek approval to obtain financing from outside sources, too. Preapproval will help you evaluate your options and offer a backup plan if you're not eligible for the exclusive offer offered by the automaker. Limits on zero-interest financing might be a great offer for some borrowers. But, there are few potential pitfalls you should be aware of when you are looking into this kind of loan. A limited selection of interest-free financing may only be available for certain kinds of vehicles. The first thing to consider is that the vehicle you purchase will almost certainly have to be . Automobile manufacturers also offer special financing deals for vehicle models where there's surplus stock that must be moved. Limits on repayment options: Depending on the terms of the deal you're offered, the repayment options you have with the 0% financing option may be more restricted. In most cases you'll have a shorter time to pay off the loan than you might have otherwise. There's nothing wrong with paying back the loan in a hurry but you need to ensure that you are able to afford the higher monthly payment without straining your budget. A 0% loan vs. bonuses Cash offers from automakers want you to purchase your next vehicle from their company and not from a competitor. This is a key reason that 0% financing deals are offered at all. In the interest of attracting new customers, car manufacturers frequently offer buyers. Sadly, an auto manufacturer might not let you benefit from both zero percent financing as well as bonus cash. If you're in this dilemma, you'll have to determine which savings opportunity is . Tips from Bankrate
Utilizing an application is a way to evaluate the 0 percent loan rate versus bonuses in cash. Sometimes, taking cash rebates that a dealership offers with an increased loan APR will result in greater savings overall. In other instances, 0 percent financing might be the clear winner.
Do you want to take the cash and then refinance later? You might have to accept normal financing through an automaker's private lender to qualify for certain cash incentives. In the exchange, there's a possibility that you'll get a better interest rate than through your bank or an outside lender. Based on your circumstances and needs, a new auto loan within a couple of months might be an effective strategy. However, there are a few disadvantages to take into consideration first. Namely that taking out two auto loans reverse-to-back both the original one and the one you refinance it by -- could damage the credit score for quite a while. A combination of loans could result in at least two negative marks credit marks on your report. In addition, adding two loans to your credit report, even though one pays on the other can decrease your average age for your accounts that appear on credit report. When it comes to credit score, the older the average age of your accounts, the more favorable. Key takeaway
Cash incentives can lower the amount you have to take out a loan, but refinancing it afterward can affect your credit score and cause it to take a temporary hit.
When is an APR rate of 0% isn't worth the cost? It may be beneficial to forgo special manufacturer financing offers in the following circumstances. The repayment terms don't fit your budget. Low-interest car loans often offer shorter financing terms. Based on your income, it could make your monthly payment impossible to afford. For instance, if a zero percent car loan runs over four years but you would typically be financing for five years cost could be significant. Average rate
0% APR
The amount to be financed
$25,000
$25,000
A loan term
5 years old
4 years
APR
4%
0%
Monthly payment
$460
$520
As you can see, on the basis of a $25,000 vehicle loan from manufacturers for four years, the monthly installment is approximately $520. A $20,000 car loan that is financed over five years at a 4-percent interest rate would require the monthly payment to be $460. You can utilize an online auto loan calculator to do the math for your potential loan. Financial experts often recommend the vehicle's monthly payment to 20% or less of your take-home salary per month. Experts suggest you pay 10% of your gross income. It's tempting to buy an expensive car. You shouldn't decide to increase your auto budget just to qualify for special financing. If you're planning to pay $10,000 cash for the purchase of an auto loan with a $30,000 cost just to avail of no-interest financing probably isn't an appropriate financial decision. Cash rebates can provide you with greater savings. Cash-back rebates typically don't apply to buyers who are using the manufacturer's financing. If you analyze the numbers and cash rebates can provide you with a greater savings opportunity, a 0 percent financing offer isn't worth the cost. Imagine you can take advantage of a cash-back deal on a new car purchase. If you buy a brand new car with an estimated price of $30,000 the incentive could reduce your purchase price down to $25,250. If you were to finance $25,250 with an interest rate of 4 percent in five-year terms, you'd have to pay the interest of $2,651. In that scenario the total cost would be $27,901 -- in the event that you didn't include additional products such as extended warranties or pay any other financing fees. You could also pay the entire $30,000 price and choose a zero percent APR. Assuming no add-on products or fees, you'd still pay $2,099 more in this case than what you'd get if you took the cash rebate. Do's and Don'ts of APR-free deals If you review the options available and determine that an auto loan is the best choice to make, the following do's and don'ts may aid you in your decision-making. Don't
Don't
the purchase price before you apply for the purchase price before you ask for the APR the purchase price before you ask for the 0 percent APR.
You can take a short-term loan with a large monthly payment amount you can't pay for.
Get pre-approved to get an automobile loan before you visit the dealership.
Consider a longer-term loan to reduce your monthly payments even if it costs you more in total.
Confirm that you can manage the monthly payments.
Select 0% financing over cash-back incentives without comparing the overall savings.
Check if the manufacturer has incentives for cash-back that you can mix with the special financing offer.
Skip the down payment when you have the money to make one.
The bottom line The key to determine if a 0 percent APR car deal is worth it for you is to assess it against the cost of an automobile loan from an external lender and figure out your real monthly cost. In the case of your particular situation, the deal may not truly save you money. There are a few instances where special financing may not be as effective as it appears and obtaining it usually requires excellent credit. Make sure you are current on your credit and that the interest-free loan won't cost you more in the long run.
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Written by the contributing author Michelle Lambright Black is a credit expert with more than 19 years of experience, a freelance writer and a certified expert witness on credit. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader's Digest, among others. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to take control of their finances by providing precise, well-studied information that break down complex topics into manageable bites.
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