As car loan interest rates soared over the past few years, no-interest car loans have become a better deal. The average auto loan annual percentage rate (APR) for borrowers with excellent credit scores is 4.77 percent for new car loans, according to Experian’s State of the Automotive Finance Market report.
Many manufacturers and dealerships advertise no-interest car loans. These loans are offered through captive finance companies, which the manufacturer owns, and are used to attract prospective buyers. However, it is difficult to qualify for a 0 percent APR without excellent credit, and it tends only to be worth it if you can save money on your monthly payment.
What is 0% APR on a car loan?
A 0 percent APR or interest-free auto deal essentially means you borrow money for free. It’s only available for new or CPO cars, though, and you’ll typically need excellent credit and a solid financial profile to qualify.
Your monthly payments reimburse the lender for the money it paid the auto dealer, but no extra money from your pocket goes into the lender’s bank account. This differs from the usual approach, where the lender charges interest in exchange for financing. Interest and fees, after all, are the primary ways lenders make money.
When auto manufacturers offer 0 percent financing, they may try to make up for “lost” income in other ways, like with add-on products or gap insurance. You also might have to forgo benefits like rebates that normally bring down your purchase price. You may also face a limited selection of models and trims to choose from as well as limited repayment terms of just a few years.
Where can you find 0% financing?
Most often, captive finance companies linked to auto manufacturers are the only way to get an interest-free car loan. These include:
- Ford Motor Credit.
- GM Financial.
- Nissan Finance.
- Toyota Financial Services.
How does a 0% APR work?
Zero-interest car loans work similarly to any other auto loan. You will apply for financing, and if you qualify, sign any necessary loan documents. The only difference is that you won’t pay interest — though there may be other fees you need to worry about.
The amount you save on 0 percent APR car loan can be significant. For example, this is the difference between monthly payments and interest paid for a $41,500 car loan financed for 60 months:
| APR | Monthly payment | Total interest paid |
|---|---|---|
| 0% | $692 | $0 |
| 6.35% | $809 | $7,045 |
In general, the only lenders that offer 0 percent financing are captive finance companies and are linked to auto manufacturers. If a manufacturer wants to sell more of a particular model due to overstock, it might offer interest-free auto loans to select borrowers through its own financing arm.
When is 0% APR financing a good idea?
No-interest financing is a good choice if you plan on financing a new vehicle. Manufacturers typically don’t offer it on base models, so you’ll pay for extra features.
Come to the dealership with a preapproved financing offer from a lender. By doing this, you can calculate how much you’ll save on interest with 0 percent financing.
If you can afford the payment and know you’ll save a few thousand on a car you want to buy, no-interest financing is the way to go. Otherwise, consider it carefully alongside other financing options.
<learn more link> Struggling to decide between a rebate and a 0 percent APR deal? Try Bankrate’s rebate vs. low-interest car payment calculator.
Steps to get a 0% APR car loan
If you’re considering a no-interest car loan, here’s how to move forward and tips to strengthen your approval odds.
1. Make sure your credit is excellent
Lenders want to ensure you have a near-perfect history of making payments and handling your debt before offering you no-interest financing. An excellent credit score — 781 or higher — will get you the best deal on financing, but you can still qualify for a competitive interest rate if your score is 670 or higher.
A steady source of income is equally important. These loans are often only available for shorter loan terms — up to 48 months — resulting in high payments. The lender will want to know you can comfortably afford your car payments and that there’s little or no chance you’ll default on the loan agreement.
2. Save up for a down payment
You may need a larger down payment. Even if you aren’t required to put money down to qualify for financing, many lenders require a hefty down payment to qualify for a 0 percent interest auto loan.
Lenders also want to see a low debt-to-income (DTI) ratio. A low DTI confirms your income will cover this new debt atop other payments you may be making.
3. Research available 0% APR car deals from manufacturers
Unfortunately, you won’t find no-interest auto loans through traditional banks, credit unions or online lenders. You’ll need to do some legwork to identify auto manufacturers with captive finance companies offering these deals.
If you prefer particular manufacturers, visit their websites and view the page listing current financing offers. Look for deals from at least three manufacturers before moving to the next step. You can also search for deals by model or contact the dealer directly before shopping for vehicles to learn more.
4. Negotiate and apply for the loan
Zero percent financing is just a small portion of the car-buying process. You should still negotiate the car’s price like any other buyer.
If possible, avoid disclosing your 0 percent auto loan before negotiating the purchase price. Remember, the dealer wants to maximize their profits on these deals. So, disclosing your intentions of applying for a no-interest car loan before agreeing on a price point could hurt your chances of truly getting the best deal on a new ride.
Dealerships may also press you to opt for added features, gap insurance or an extended warranty. These are optional, so be firm if you don’t want them.
Once you’ve negotiated the purchase price of the vehicle with the dealer, the next step is to formally apply for financing.
Bottom line
The key to deciding if a 0 percent APR car deal is worth it for you is to compare it against an auto loan from an outside lender and find your true monthly cost. Depending on your circumstances, the deal may not truly save you money. There are also a few situations where special financing isn’t as good as it seems, and qualifying often requires excellent credit. Check current auto loan rates and ensure an interest-free option won’t cost you more overall.
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