Should You Get a 0% Car Loan?

Written by Veronica Ott

Should You Get a 0% Car Loan?

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Auto Dealers Car Financing Car Loan

Buying a car is one of the largest purchases you’ll make in your life, second to a home. Because of the weight of the purchase, it’s a rather big decision to make. Not only is your financial situation a consideration, but the car itself, the lender, and the dealership are additional things to consider. Many Canadians need a car to facilitate their day to day life, for commuting or running errands. But, despite the need, the cost of a car can put a dent in your finances. Naturally, when individuals see 0% car financing, they want to know what it means and how they can obtain such a favourable offer. To learn more about 0% car loans, continue reading below.

What Does It Mean to Have a 0% Car Loan?

As the name implies, 0% car loans have no interest at all. You might be thinking, no interest? Sign me up. Although, upon further thought, you might think, how exactly are lenders okay with not making any money on the money they give to borrowers? After all, lenders charge interest on the money they lend because that’s how they earn a profit.

Lenders are not the ones who are offering 0% financing, it is actually the automaker or the dealership. Automakers typically offer 0% financing with efforts to sell more of their vehicles. Despite having to pay interest on their customer’s loans, they will still earn a profit on the sale of their vehicles. Dealerships offer 0% financing because, even after they pay the interest on your loan, they will turn a profit. However, dealerships usually only make this offer if you already qualify for a low-interest rate therefore they won’t be losing a significant amount of money.

How Do Dealerships Benefit from 0% Car Loans?

As mentioned above, one reason is the dealership will still profit on the car sale even after paying the interest on your loan. Other reasons might be to meet their sales quota, get rid of idle inventory. Or to bring more business into their dealership. The last reason is particularly notable because not all customers who walk into the dealership will qualify for 0% financing. At this point, the car salespeople can begin their battle of making a sale to a customer, regardless of whether they qualify for 0% financing since they already know they’re interested in purchasing a car. 

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The Pros and Cons of 0% Car Loans

On the outside, 0% car financing sounds amazing and it absolutely is for some people. However, there are some drawbacks to using 0% financing too. Let’s explore both the pros and cons below. 

Pros

• No Interest. The most obvious advantage is no interest. Without the additional interest cost, you’ll be saving more money on your vehicle purchase. 
• Pay Off Your Loan Faster. Without interest, all your car payments will go toward the actual car purchase. Not only will your money go solely towards the principal, but you can also get away with a shorter-term since interest isn’t a consideration.
• All the Bells and Whistles. If you want a super luxury car with leather interiors, alloy wheels or anything else, the cost could be included in your 0% loan.

Cons

• Applies to Brand New Cars. Usually, this offer is only applicable to brand new cars. If you secure 0% financing, you’re likely going to pay more for the vehicle than if you opted out for last season’s model or a used car. 
• Rare Offer to Find. It’s not often that automakers or dealerships will agree to pay interest on your loan thereby making this offer rare to come by. Even if you do find a 0% financing offer, it is usually only effective for short periods of time. 
• Potential Scams. Sometimes 0% financing is too good to be true. In other words, someone might use 0% financing to trap you into a scam. 
• Great Credit Required. Since 0% financing is such a lucrative offer, it is typically only offered to individuals with the greatest credit. If you don’t have that, you’ll have trouble securing a 0% offer.  

How Do I Qualify for a 0% Car Loan?

The biggest thing automakers and dealerships offering 0% car loans will look for is great or excellent credit. This means your credit score should be impressive with a good credit history. In addition, you should be in an outstanding financial position, including having little outstanding debt. 

Is a Down Payment Obligatory on a 0% Car Loan?

As with most car loans, down payments are not a requirement, 0% financing is no different. However, it is in your best interest, not the automaker or the dealership’s, to make a down payment because you’ll pay less over the course of the loan’s term.

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How Can You Tell If You Got a Good Deal?

If you decide to proceed with a 0% financing vehicle purchase, you should watch out for red flags to ensure you’re getting a good deal. The last thing you want is to be stuck with a car loan you can’t afford, even if there is no interest Below are various factors to consider when entering a 0% car loan agreement.

• Large Down Payment. The larger your down payment is, the less you’ll have to pay back over the years. Inquiring about down payments and maximum amounts you can pay is something to consider. 
• Loan Term Under 60 Months. Car Loans that are longer than 5 years like 84-month auto loans run the risk of negative equity in your vehicle. To play it safe, the loan’s term should be under 60 months or 5 years. 
• You Love the Car. There’s no point investing a lot of money into a car that you aren’t crazy about. The car should be worth the price tag to you.
• Duration of 0% Financing. Some automakers and dealerships will only offer 0% financing for a certain period of the loan’s term. This means you might end up paying interest towards the end of the loan term. Of course, having 0% financing for the entire loan term is the most desirable. 

What should you do if your car loan is more than your car is worth? Find out here.

Is 0% Financing Right For Me? 

In the current world of cars, 0% financing is like a unicorn, it’s hard to find and you might wait a whole lifetime until you see an offer. If you need a car now, waiting for a 0% financing offer is probably unrealistic. In addition, 0% car financing can be quite expensive, even though you’re saving on interest. But, if it’s the car of your dreams and you can afford it, 0% financing could be right for you.