What's the Catch With 0% Financing Car Loans? (2024)

Quick Facts About 0% Car Loans

You repay the money you borrow and nothing more with a 0% APR car loan.
When you get 0% financing, you typically won’t receive additional manufacturer incentives, such as cash-back offers.
Attractive 0% loans are reserved for car buyers with exceptionally good credit.

If you’re interested in buying a car, you’ve probably noticed some low-interest special offers and incentives from automakers. Some brands offer loans with 0% APR interest, which suggests that you can finance a car and pay no interest over the loan term.

However, is 0% financing too good to be true? Read on to learn about 0% APR financing and whether getting a no-interest car loan is always the best choice.

What Does 0% Financing Mean?
How Do 0% Car Deals Work?
Get a Free Credit Report
When Is 0% a Good Deal?
When to Avoid 0% Financing
How to Get 0% Auto Financing
Bottom Line on 0% APR Financing

What Does 0% Financing Mean?

Having 0% financing on a car loan means you pay no interest to the lender on the money borrowed to buy the car. In other words, a 0% APR car loan is an opportunity to pay the same amount of money as a cash buyer, even though you’re spreading your payments over a longer term.

When you take out a car loan, you’re borrowing money to pay for a car, and that much is obvious. But the lender typically doesn’t give you that money for free. Instead, you pay interest and fees to the bank for lending you the money. APR stands for annual percentage rate, which calculates how much the lender charges to borrow the money.

With a 0% financing deal, you repay the money you borrow and nothing more.

How Do 0% Car Deals Work?

Since you’re not giving the bank any incentive to lend you money, you might wonder how it’s possible to get a 0% car deal. The answer comes down to this: It usually isn’t the bank doing the lending but rather the automaker itself. It’s called captive lending.

That’s why you sometimes see Chrysler Capital, Nissan Motor Acceptance Company, Volkswagen Credit, and the financial arms of other manufacturers offering to finance a vehicle at the dealership.

The way an automaker makes money with a 0% deal is simple: The money does not get made on financing but rather on the car itself. Dealers will try to sell you extras to make up the difference, including extended warranties for your vehicle.

Also, the cost of financing gets built into the price of the car. If you obtain a 0% financing car deal, you likely will not get any other incentives on top of that. And that means the automaker still pockets a nice profit on the sale of the car despite not making any profit on the financing.

If you have the cash to buy a car outright, you might be better off taking advantage of bonus cash incentives rather than 0% financing.

Pros of a 0% APR Car Loan

Repay only the dollar amount borrowed without any interest charges.

Cons of a 0% APR Car Loan

Only borrowers with outstanding credit qualify.
Availability is limited to specific models and trim levels.
Shorter loan terms mean higher monthly payments.

Is it a Scam?

No, 0% car deals aren’t usually a scam. However, the deals can often be challenging to qualify for, and that’s where many shoppers run into disappointment. For example, automakers or dealers will often advertise 0% interest, even when it’s only available to shoppers with long credit histories and the absolute highest credit scores.

Buyers with excellent credit scores are likely to make every payment on time for the life of the loan and maybe even pay it off early, which makes it worth it for the automaker to offer 0% financing. When a borrower’s credit history looks excellent, car finance companies, banks, and other lenders face less risk.

When shoppers with only average or poor credit histories reach the dealership, they learn they don’t qualify for the special rate. That’s when buyers find out about a higher interest rate that will earn more money for a dealer or an automaker.

How to Get a Free Credit Report

To find out your credit score to see if you qualify for 0% financing, check your credit score with all or any of the three credit reporting bureaus: Experian, Equifax, and TransUnion.

By law, consumers can obtain free credit reports once a year. According to the federal government, the official website to get your free credit report isAnnualCreditReport.com. Around the time of the COVID-19 pandemic, the credit reporting bureaus began offering free monthly credit reports.

Understanding Your Credit Score

FICO scores, or those created by the Fair Isaac Corporation, range between 300 to 850. Typically, lenders look for a score of 800 or above for 0% car loan offers.

According to Experian, most consumers’ credit scores fall between 600 and 750. The average credit score in the U.S. remained steady at 714 last year, or 11 points higher than before the pandemic when the average score was 703.

Poor: 300-579
Fair: 580-669
Good: 670-739
Very Good: 740-799
Excellent: 800-850

When Is 0% a Good Deal?

Financing at 0% is a good deal if you can afford the loan. Check Autotrader’s Car Affordability Calculator when you begin car shopping.

It’s also a good deal if you have had your eye out for a new car for a while, your credit score looks excellent, you crunched the numbers in your budget to figure out a monthly car payment you can afford, and the perfect 0% financing deal came up for a car on your shopping list.

Like with any financial commitment, it’s always good to do your homework ahead of time to avoid buying a car and taking on debt on impulse. That is a recipe for buyer’s remorse, and you could get stuck hating your new vehicle and hating your new loan even more.

If you’ve been planning for a new car purchase and found a 0% financing deal that you qualify for and is friendly to your budget, it’s an excellent way to borrow money with no interest.

MORE:How Much Money Should You Put Down on a Car?

When to Avoid 0% Financing

Financing at 0% is a bad deal if you can’t afford the loan. If you want to buy a new car just because a 0% financing deal seems too good to pass up, you may want to pause and reconsider.

Were you even looking for a new car, or did you come across a great financing deal and get car fever? Even if you don’t pay any interest on the loan, can you make the monthly payments work within your budget? Are you comfortable with the risk involved with financing a car rather than owning it outright?

Any new car shopper needs to consider all of these questions. In other words, don’t rush into a car loan you can’t afford just because of an attractive 0% offer. Automakers run deals like these frequently in good economic times. So there’s nothing wrong with taking your time to give some extra thought and planning for your next car purchase.

Another thing to keep in mind: What can you afford as a down payment? If you get 0% financing on a new car loan but make a low down payment, then you’ll be upside down on your new vehicle (owing more on it than it’s worth) the second you drive it off the lot, and your new car becomes a used car.

Being upside down on a car is never good, and it can mean you need gap insurance. This more expensive coverage pays the difference between what you owe versus what a car is worth after depreciation if the vehicle gets totaled. A good rule of thumb is to put at least a 20% down payment on a vehicle to avoid financial insecurity.

Another way that 0% financing can be a bad deal is if it’s just too long of a loan. Typical car loan terms range from three to five years. Sometimes these deals stretch out for 72 months or six years. Six years is a lot of time to spend paying for a car, no matter how good the monthly payment seems.

What if you need to downsize or buy a bigger car but still owe money on a car you bought because of a great financing deal? The shorter the term and the higher your monthly payment, the sooner you’ll own your vehicle. Owning your car is the most financially secure position to be in with your vehicle.

RELATED:How to Negotiate a Car Deal: What You Need to Know

How to Get 0% Auto Financing

If your credit is excellent, you will qualify for a 0% interest rate. However, you will need to confirm that the rate is available for you at the dealership if your credit score shows up below 800 on your report.

Negotiate the best deal first. Before you show your hand on financing, take the car on a test drive and negotiate the best deal on the vehicle.
Find out if you qualify. At this point, the dealer will look at your credit history to see if you qualify for 0% financing. There is no specific credit score set in stone that determines whether you qualify for 0% financing. But generally, a credit score of around 740 or higher can help you obtain the lowest interest rate, like 0% financing.
Be willing to back out of the deal. If the dealer explains that you can’t obtain the loan at 0% financing, you shouldn’t necessarily back out of the deal. But consider whether you’re comfortable with the new rate the dealer presents to you instead. If it’s too high for your liking, remember you can check other options.
Look at other dealerships. You can always consider buying a car from a different dealership. You can also go to the dealership prepared with a credit union or bank financing deal to use as a negotiation point if needed.

The Bottom Line on 0% APR Financing

Finance offers with 0% interest are an excellent incentive for qualified shoppers already in the market for a new car. A 0% financing deal shouldn’t be the sole determining factor in your new car purchase. If you’ve done all the proper planning for your new car purchase and you find a 0% deal on a loan that works with your budget, it’s a great way to save money on car loan interest.