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A zero percent car loan is a financing deal that can save you hundreds if not thousands of dollars on your car. Many dealerships offer such financing deals to those who have great credit and meet other eligibility requirements. If you’re thinking of applying for a 0% financing deal, find out everything you need to know about a no-interest car loan.
0% car financing allows consumers to take out a car loan to finance the purchase of a vehicle with no interest charged. That means the entire portion of your car loan payments goes towards the purchase price, and not interest, saving you thousands of dollars.
It should be noted that only those with excellent credit are typically able to get approved for this type of financing.
Some dealerships may offer a cash rebate as an incentive to encourage consumers to buy their cars. Before you choose a cash rebate over 0% financing, or vice versa, it’s important to crunch some numbers to see where you’ll save the most.
For instance, let’s say you want to buy a car that costs $40,000. One dealership is offering a financing rate of 8% and a cash rebate of $6,000, while another is offering 0% financing, but no cash rebate.
Which one of the two would you save the most with, assuming you have a 60-month (5-year) loan term? The chart below compares the costs between the two:
| 0% Financing | $6,000 Cash Rebate | |
| Car Loan Amount | $40,000 | $34,000 (40,000-6,000) |
| Interest Rate | 0% | 8% |
| Term | 60 | 60 |
| Monthly Payment | $667 | $620 |
| Total Cost | 40,000 | $37,200 |
As you can see from this example, you’d be paying more overall with the 0% financing option. However, in other circumstances, a 0% financing option might work better, depending on the cash rebate. Ultimately, the cash rebate amount will reduce the amount of interest you pay as well as how much you pay in taxes on the total amount financed.
Check out these car insurance discounts.
It might be easy to find 0% car financing, but getting approved for such a program might not be so simple. As mentioned, dealerships typically only reserve 0% car financing for consumers with excellent credit. To qualify for this type of financing, you’ll need to meet strict loan criteria.
Keep in mind that 0% financing may not be the only good deal available. If your credit isn’t high enough to qualify for 0% financing, there may be other promotions you may be eligible for.
A 0% car loan is only offered by dealerships, and usually not with banks and other lenders. Generally, car dealerships offer 0% car financing as a way to sell more vehicles and make room for new inventory. This is why dealerships are one of the only places that offer this type of financing.
Banks and credit unions have nothing to gain from such financing, which is why they don’t typically offer it. They have no inventory to sell, and therefore no benefits to gain from offering loans with zero interest. Lenders make money from the interest they charge on loans, so unless the lender is associated with the car manufacturers themselves, they’re not likely to offer such a deal.
The perks of 0% car financing are rather obvious, but there are a few drawbacks to this type of financing that you should be aware of before you apply.
A 0% car financing deal may sound enticing, but be sure to watch out for the following red flags:
Lenders who promise approval for 0% car financing without reviewing your financial profile or checking your credit health should be avoided. Legitimate lenders will at least conduct some level review of your financial and credit profile before approving you for a loan.
Look out for lenders that offer 0% financing on vehicles that are priced much higher than other dealerships in the area. These lenders and dealers are likely trying to make a quick profit by charging you more than the fair market value of the vehicle.
Watch out for deals for zero-interest financing that are only good for a short introductory period. Once that time frame expires, you may be stuck paying a very high-interest rate halfway through the loan term.
To secure a good car financing deal, try the following tips:
Boost Your Credit Score – One of the main requirements for 0% car financing and other car financing options is having good to excellent credit. As such, taking some time to improve it is one of the best ways to help you qualify for a great car financing deal in the future.
Get Pre-Approved – Getting pre-approved for a car loan will give you a clear idea of what you can get approved for and improve your odds of securing a great loan product that fits comfortably within your budget. Plus, a pre-approval letter will save you plenty of time and hassle by helping you focus only on vehicles you can afford.
Buy Used – Buying a used vehicle instead of a new one can help you save a few hundred to a few thousand depending on the car model, market demand and condition. Many dealerships not only offer great prices on their used models, but they may also have good financing options at affordable rates to offer. Plus, these used cars are typically serviced and certified, which is not always the case when you’re buying from a private seller.
Car Seasons – You may notice that dealers often advertise deals and promotions at specific times of the year. For example, it’s common to see discounts near the end of the year, at the beginning of summer, or during the off-season for certain types of vehicles, such as convertibles and sports cars.
If you can get a 0% car financing deal, it may be worth seriously considering, as long as you read the fine print and make sure you’re not overpaying for the vehicle. If all checks out, you can essentially borrow a few thousand bucks for free to buy your next car.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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