APR-free car deals Do they really make sense? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with financial calculators and interactive tools, publishing original and objective content, by enabling users to conduct studies and compare information for free to help you make informed financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that are featured on this site come from companies that pay us. This compensation can affect the way and where products appear on the site, such as for instance, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage home equity, mortgage and other products for home loans. However, this compensation will not influence the content we publish or the reviews that you read on this site. We do not contain the entire universe of businesses or financial offerings that could be available 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 over 19 years’ experience, a freelance writer and an accredited credit expert witness. In addition to writing for Bankrate Michelle’s work has been included in numerous publications such as FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Written by Rhys Subitch Edited by Auto loans Editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing clear, well-researched information that breaks down complex topics into manageable bites. The Bankrate guarantee
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They’re worth it if you reduce your monthly payment. But you need an excellent credit score to qualify. Keep both its cost-effectiveness and the eligibility of your car when going for a test drive.
What exactly is 0% interest? A 0 % APR simply means that you take out a loan at no cost. Your monthly payments reimburse you the lender for the money it paid the auto dealer, but no cash you have in your pocket will go directly into your loan’s bank account. This is different from the standard way of doing business, where the lender will charge you in exchange for financing. Interest and fees are, in fact, the primary ways lenders make money. Here’s an example of the difference in monthly expenses that a zero percent APR could make versus the more common APR. Average rate
0% APR
Amount to be financed
$27,564
$27,564
The term “loan”
60 months
60 months
APR
5.47%
0%
Monthly payment
$478
$418
Total cost
$28,704
$25,064
What exactly is 0% APR? How does it work? The idea of financing a car with no interest appears too amazing to be true. However, these financing offers are a tool that manufacturers of automobiles can utilize to sell more vehicles. Lenders that offer 0 percent financing are called captive finance firms and are connected to . A few examples of captive lenders are Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. If Ford is looking to increase sales of its F-150s due to problems with overstock, it could offer zero-interest loans to select borrowers through its own financing arm. Zero-interest financing may seem more reasonable on the surface, but that’s not always the case. If automakers offer zero percent financing, they may try to cover “lost” earnings in different ways. For example, a dealership may push hard to sell you on the spot or in conjunction with your vehicle. It is also possible to give up benefits such as rebates that would normally lower the purchase price. How to qualify for an 0% APR vehicle deal? Zero percent financing offers typically only available to borrowers who have excellent credit ratings generally referred to as a rating of 800 and over. It is important to check this before you start shopping for financing for your car. Every lender has its own definition of excellent credit, and the requirements for qualifying could vary from vehicle to vehicle. Because the zero APR qualifications differ greatly it is best to contact the dealership prior to the time. Ask what criteria you need to fulfill to qualify for an interest-free loan on a particular car. Apart from your credit score, an auto lender may consider additional factors in evaluating your application, for example: . Employment history. Address and income verification. Regardless of the condition of your credit — good, bad, fair or excellent — you should take the time to seek out financing from other sources as well. Preapproval will help you evaluate your options and offer an alternate plan in the event that you aren’t eligible to take advantage of the special offer from the automaker. Limits of 0% APR financing Interest-free financing might be a great deal for some people. Still, there are a few potential traps to be aware of when you are considering this type of financing. A limited selection of interest-free financing is available only for certain types of vehicles. First, the car you purchase will almost certainly require . Auto manufacturers also tend to make special financing deals available for models of vehicles when there’s an excess of stock must be moved. Repayment options are limited Based on the offer you’re offered, the repayment options you have with the 0% financing option may be limited. Often you’ll have a shorter time to repay the loan as you would otherwise. Of course, there’s nothing wrong with repaying the loan quickly, but you should be sure that you can afford the higher monthly payment without stressing your budget. Zero percent financing is different from. bonuses Cash offers from automakers would like you to buy your next vehicle from their brand, not a competitor. This is one of the main reasons that 0% financing deals are offered in the first place. In the interest of attracting new customers, auto makers frequently offer buyers. However, a car manufacturer may not allow you to take advantage of both 0 percent financing and bonus cash. If you’re in this issue, you’ll have to decide which savings opportunity is . Tips from Bankrate
Utilizing an application can help you compare 0 percent financing versus bonus cash incentives. Sometimes, using the cash rebate that a dealership offers with an increased loan APR can result in better overall savings. In other situations, 0 percent financing might be the clear winner.
Do you need to cash out and refinance later? You may have to agree to standard financing through Automaker’s own captive lender to qualify for certain types of cash incentives. In the event of a loan, it’s possible that you’ll get a better interest rate than get through your bank or external lender. Depending on your situation, your new auto loan in a few months could be a good approach. But there are some downsides to think about first. In particular the fact that having two loans in a row — the original loan and one that you refinance it by — could damage your credit for a period of time. A combination of loans can result in at least two marks appearing on your credit reports. The addition of the two loans on your credit reports regardless of whether one is paid off the other, will decrease how old your your accounts on your credit reports. Regarding credit scoring, the older the average account is, the more favorable. The most important lesson
Cash incentives can reduce the amount you have to take out a loan, but refinancing it afterward could result in your credit score to take a temporary hit.
When is an APR rate of 0% not worth it? It might make sense to skip specific financing options offered by manufacturers in the following scenarios. The repayment terms don’t fit your budget. Low-interest auto loans usually come with shorter finance terms. Based on your income, this can make your monthly payments not affordable. For instance, if the 0 percent car loan lasts 4 years but you typically be financing for five years price differs and can be significant. Average rate
APR 0%
Amount to be financed
$25,000
$25,000
The term “loan”
5 years old
4 years
APR
4%
0%
Monthly payment
$460
$520
You can observe, on an automobile with a $25,000 loan through the manufacturer for four years, your monthly payments would be about $520. A $25,000 car loan with a five-year repayment at a 4-percent interest rate requires a monthly payment of $460. It is possible to make use of an auto loan calculator to do the math for your prospective loan. Financial experts generally recommend keeping your monthly vehicle payment to 20 percent or less of your take-home salary per month. And some experts suggest that you at 10% of your gross income. It’s tempting to buy more expensive vehicles. shouldn’t decide to increase your car budget in order to be eligible for a special financing. If you’re looking to purchase a $10,000 cash payment for a , taking on the cost of a new car loan with a $30,000 tag just to take advantage of no-interest financing probably isn’t a wise financial move. Cash rebates provide greater savings. Cash-back rebates typically do not apply to customers who are using the manufacturer’s financing. If you analyze the numbers and cash rebates can provide you with a greater chance to save money, a zero percent financing offer isn’t worth the cost. Imagine taking advantage of a $4,750 cash-back offer on a new vehicle purchase. For a new car that has a $30,000 price tag this incentive could bring your purchase price down to $25,250. If you borrowed $25,250 at the rate of 4 percent for five years, you’d have to pay $2,651 in interest. In that scenario your total expense would be $27,901 in the event that you didn’t include additional products such as extended warranties, or incur other fees for financing. You could also pay the entire $30,000 price and then choose a zero percent APR. Assuming no add-on charges or products, you’ll have to pay an additional $2,099 in this case than what you’d pay by taking the cash rebate. Do’s and Don’ts of APR-free deals If you’ve analyzed the options available and determine that an auto loan is the best choice that you make for yourself, then these tips and don’ts could aid you in your decision-making. Don’t
Don’t
the purchase price before you apply for the APR offer. APR offer.
Take an unrestricted loan with a large monthly payment that you cannot manage to.
Make sure you are pre-approved to get an automobile loan prior to visiting the dealer.
Opt for a long-term loan to lower your monthly payments in the event that it will cost you more in total.
Verify that you can manage the monthly payments.
Select 0% financing over a cash-back incentive without comparing the possible savings.
See if the manufacturer offers incentives for cash-back that you can combine with the special financing offer.
Don’t pay the downpayment when you have the money to make one.
The bottom line The key to determine if a 0 percent APR car loan is worth it for you is to assess it with an auto loan from an external lender and determine your actual monthly costs. Depending on your circumstance, the deal may not actually save you money. There are a few situations where special financing isn’t as effective as it appears, and qualifying often requires a high credit score. Make sure you are current on your credit and that interest-free won’t end up costing you more in total.
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Written by the contributing writer Michelle Lambright Black is a credit expert with more than 19 years experience. She is an independent writer, and a certified 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. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to manage their finances through providing concise, well-studied and well-researched content that break down complex subjects into bite-sized pieces.
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