You see the advertisements on television and hear them on the radio promoting the financing deal of a lifetime on a new car. While zero-percent interest on a car loan may sound appealing, it’s important to understand how these deals work, qualification criteria, and where to find them.
How 0% APR Auto Loan Financing Works
Zero-interest auto loans are offered by auto manufacturers to entice customers to buy a particular vehicle. These deals are designed to sell high volumes of select makes and models. But it’s highly probable that you’ll have to finance the vehicle in-house to snag the deal.
The primary benefit of 0% APR auto financing lies in the opportunity to save a bundle on what would’ve otherwise been spent on interest.
You also get the luxury of making payments over time, which allows you to maintain a healthy cushion or even invest the money so compounding interest can work in your favor.
Dealer-Only 0% APR Interest Deals
Some dealerships occasionally offer their own version of zero-percent financing. In this case, interest will still be applied to the car loan, but the dealership will cover the associated costs.
How to Qualify for 0% Interest on an Auto Loan
Unfortunately, advertisements can be misleading as most 0% interest deals are reserved for individuals with excellent credit, usually around 680 or higher.
In fact, 0% interest auto loans only account for 9 percent of in-house financing transactions, notes Edmunds.
But keep in mind that the minimum credit score varies by auto manufacturer, which means you may qualify for a zero-interest loan with one manufacturer and not the other.
So, it’s best to inquire with the financing department at an auto dealer near you to learn more. They should be able to provide further information about the qualification criteria without running your credit.
How to Find 0% APR Interest Deals
Oftentimes, there are several 0% interest rate deals going on at once, but you may have to do a bit of digging to find them. Not seeing or hearing an ad doesn’t mean that a deal isn’t available.
A quick online search on the auto manufacturer’s website on the page where promotions are listed may be the easiest way to spot offers.
But don’t stop there. Also, explore special financing promotions and cash rebates offered through local dealerships. They may be running their own 0% APR deal with less stringent qualification criteria.
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How to Apply for a 0% Interest Auto Loan
Applying for a no-interest car loan is the same as applying for any other car loan. You’ll need to complete an in-house financing application, either online or on-site, that includes information about your income, and consent to a credit check.
But before applying for a loan, you should:
Get a Copy of Your Free Credit Report
Doing so will give you an idea of where you stand so you won’t be caught off guard when applying for loans. Keep in mind that the credit score lenders see may be different. Also, if your credit scores are on the lower end of the spectrum, it may be worthwhile to work on improving your score before applying.
This guide shows you how to get a copy of your free credit report from each of the three major credit bureaus. And if you don’t know how to find your credit score, this guide provides additional guidance.
Shop Around for Additional Financing Offers
Why so? Well, it gives you other low-interest financing options in case you are a few points shy of the minimum credit score for zero-percent financing. You’ll also have bargaining power, as the dealer will try to undercut other offers on the table to get you the best deal and earn your business.
And don’t worry about your credit scores taking a hit from multiple applications. According to myFICO, auto loan applications made within a 30-day window only count as a single inquiry if you find a loan that suits you within this period.
Run the Numbers if Other Incentives
If there’s bonus cash back or a rebate, you may get more from those deals than zero-percent financing. And also consider the cost-savings that could be incurred from refinancing the loan.
To illustrate, assume you’re purchasing a vehicle for $20,000, but will only borrow $15,000 (this amount includes taxes and registration fees) due to $5,000 down payment.
Because of your strong credit history, the dealer has given you the option to pay no interest over the life of the loan. You can also forgo this opportunity to receive $1,800 in bonus cash, but you’ll have to pay interest of 2.99% over the 4-year loan term.
Here’s how the numbers play out:
|Option one||option two|
|Interest rate||0%||2.99% with $1,800 in |
bonus cash from the dealer
|Interest paid over |
life of loan
|Total amount paid |
In this case, option two would be the best choice. Despite paying $934 in interest over the life of the loan, you’ll still walk away with $866 because of the bonus cash ($1,800-934).
Some Important Considerations
It’s not uncommon for the salesman to focus on the monthly payment amount and not the total amount the car will cost you, to convince you that you’re getting the best deal. This is another area where the dealer will attempt to boost their profit margins.
So, it’s pertinent that you pay close attention to what you’ll pay over the life of the loan for both principal and interest. This means you should talk numbers before you disclose how you’ll be paying for the vehicle.
You should also make a down payment if possible, even if the auto lender isn’t requiring you to do so. This minimizes the chances of losing money due to depreciation should you decide to sell the vehicle at a later date.
The same concept applies to loan terms; the shorter, the better, as an extended period means you’ll pay more in interest and could possibly lose on the sale due to depreciation.
Finally, avoid unnecessary add-ons, as they may be cheaper to purchase elsewhere. They may not seem like such a big deal, expense wise, but dealers often attempt to pad the purchase price on 0% interest offers by convincing you to buy bells, whistles, and extended warranties.
What If You Don’t Qualify for 0% APR Financing?
If you don’t qualify for 0% APR financing and need a new car right away, return to the drawing board to view other interest rates that may be available to you. Use prequalification tools from online lenders to determine what you may qualify for with no impact to your credit scores.
Still no luck? Credit unions and community banks may be able to assist, as they have competitive auto loan products for those without perfect credit. Also, consider buying an older car and paying cash to avoid interest altogether.
See also: How to Finance a Car in 5 Easy Steps
It may be easier than you think to finance a car at 0% interest. And if you do the legwork and find a deal that best suits your needs, you’ll be driving off the lot in your dream car in no time.