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Car deals with 0% APR: Are they worth it? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by providing you with interactive financial calculators and tools that provide objective and original content. We also allow users to conduct research and compare data for free to help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site come from companies that pay us. This compensation could affect how and when products are featured on this website, for example for instance, the order in which they may be listed within the categories of listing, except where prohibited by law for our mortgage, home equity and other home loan products. However, this compensation will have no impact on the information we publish, or the reviews that you read on this site. We do not cover the universe of companies or financial deals that may be open to you. @VeraNovember/Twenty20

6 minutes read Read The publication was published on March 02, 2023.

Written by Michelle Black Written by Contributing writer Michelle Lambright Black is a credit expert with over 19 years of experience. She’s an independent writer, and an accredited credit expert witness. In addition to writing for Bankrate, Michelle’s work is published in numerous publications, including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Written by Rhys Subitch Editored by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to control their finances through providing concise, well-researched and accurate information that breaks down otherwise complex issues into digestible chunks. The Bankrate promise

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We make sure that everything we publish will ensure that our content is reliable, honest and reliable. The loans reporters and editors concentrate on the things that consumers are interested about the most — various kinds of loans available as well as the best rates, the most reliable lenders, ways to pay off debt and more — so you’ll be able to feel secure when making your decision to invest your money. Integrity of the editing

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They’re worth it if you save money on your monthly payment. However, you must have good credit score to be eligible. Be sure to keep both the cost-effectiveness as well as you’re eligible while taking a test drive.

What is 0% APR? A 0 percent APR or simply means that you take out a loan for no cost. The monthly installments you pay back you the lender for the money it paid to the dealer, but no cash from your pockets goes directly into your loan’s bank account. This differs from the usual way of doing business, where the lender charges in exchange for financing. The fees and interest in the end, are the primary ways lenders make money. Here’s an example of the difference in the monthly costs that a 0 percent APR might bring in compared to a more standard APR. Average rate

0% APR

Amount financed

$27,564

$27,564

A loan term

60 months

60 months

APR

5.47%

0%

Monthly payment

$478

$418

Total cost

$28,704

$25,064

How does 0% APR work? A car loan that is interest-free sounds too good to be true. However, these financing offers are a method that auto manufacturers can use to sell more vehicles. The lenders that provide zero percent financing are referred to as captive finance companies , and are connected to . Some examples of captive lenders include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. So, if Ford is looking to increase sales of its F-150s to address concerns about overstock, it may offer zero APR loans to select borrowers through its own financing division. No-interest financing seems more reasonable on the surface however, that’s not always the situation. If automakers offer zero percent finance, they may attempt to compensate for «lost» income in other ways. For example, a dealership might try to convince you something that you like or using your car. It is also possible to give up benefits such as rebates, which typically lower your purchase cost. How to qualify for the 0% APR car deal? Zero percent financing offers are typically reserved for those with excellent credit usually referred to as having a rating of 800 or above. It is important to check this before you make any purchases for auto financing. Each lender also has its own definition of excellent credit, and the requirements for qualifying could vary from vehicle to vehicle. Since zero APR qualification standards vary so widely it is best to call the auto dealership prior to the time. You can inquire about the criteria you will need to meet to qualify for interest-free financing on a specific automobile. Apart from your credit score and your income, an auto lender will consider other aspects when it reviews the application, including: . Employment history. Income and address verification. No matter the state of your credit -good, bad fair or excellent — you must seek out to obtain financing from outside sources too. Preapproval will help you evaluate your options and give you a backup plan if you don’t qualify for the exclusive offer offered by the automaker. Limits on zero-interest financing might be a great offer for some borrowers. Still, there are a few potential pitfalls you should be aware of when contemplating this type of financing. The limited options for interest-free financing is only available for certain kinds of vehicles. First, the car you buy will most likely require . Automobile manufacturers also reserve special financing offers on certain models of cars when they have a surplus in stock that needs to be cleared. Repayment options are limited: Depending on the deal, your repayment options with 0 percent financing may be more restricted. In most cases you’ll be given less time to repay the loan than you might have otherwise. Of course, there’s nothing wrong with paying back the loan quickly however, you must ensure that you are able to manage the greater monthly payments without stressing your budget. A 0% loan vs. bonus cash . Automakers prefer that you purchase the next car from their brand and not from a rival. This is a key reason that 0% financing deals are offered in the first place. In the interest of attracting new customers, auto makers frequently offer buyers. Sadly, an auto manufacturer might not let you take advantage of both zero percent financing as well as bonus cash. If you’re in this issue, you’ll have to decide which savings opportunity is . Tips from Bankrate

Using an is a way to evaluate zero percent financing with cash rewards. Sometimes, using the cash rebate that a dealership offers with the higher loan APR can result in better savings overall. In other instances financing at 0 percent could be the best option.

Should you take the cash and then refinance later? You might have to accept normal financing through an automaker’s private lender to qualify for certain types of cash incentives. In exchange, there’s a chance that you’ll receive a higher interest rate than you might with your bank or an external lender. Depending on your situation and needs, a new auto loan in a few months may be an effective approach. However, there are a few disadvantages to think about first. For instance, taking out two auto loans reverse-to-back both the original one and the one you refinance it by — could damage your credit rating for a while. A number of loans will cause at minimum two hard credit marks on your report. In addition, adding 2 loans on your credit reports, even though one pays off the other, could decrease your average age for your accounts that appear on credit report. In terms of credit scoring the greater the average account is, the better. The most important message

Cash incentives may reduce the amount you have to take out a loan, but refinancing it afterward may cause your credit score to be affected for a short period of time.

If an APR rate of 0% not worth it? It could be wise to skip special financing deals from manufacturers in the following scenarios. The terms of repayment don’t match your budget. Low-interest auto loans often offer shorter financing terms. Based on your income, it could make your monthly payment impossible to afford. For instance, if the 0 percent car loan is 4 years while you would typically credit for five years in the future, then that cost difference can be meaningful. Average rate

0% APR

The amount to be financed

$25,000

$25,000

A loan term

5 years

4 years

APR

4%

0%

Monthly payment

$460

$520

It is evident that on a $25,000 car loan by the manufacturer for four years, your monthly payments is approximately $520. A $20,000 car loan financed over five years at a 4 percent interest rate requires an annual payment of $460. You can make use of an auto loan calculator to calculate the maths for your possible loan. Financial experts often recommend that you limit your monthly car cost to 20 percent or less of your take-home salary per month. And some experts suggest that you at 10 percent of your total income. It’s tempting to buy more expensive vehicles. shouldn’t decide to increase your car budget in order to qualify for special financing. If you were planning to pay $10,000 cash for an automobile, then taking out a new auto loan with a $30,000 price charge just to get the benefit of no-interest financing is probably not an appropriate financial decision. Cash rebates can provide you with additional savings. Cash-back incentives typically aren’t available to those who use the manufacturer’s special financing. If you analyze the numbers and cash rebates can provide you with a greater savings opportunity, a 0 percent financing rate isn’t worth the cost. Imagine that you could take advantage of a $4,750 cash back offer on a brand new car purchase. For a new car that has an estimated price of $30,000 the incentive could reduce the price of your purchase down to $25,250. If you financed $25,250 at an interest rate of 4 percent over five years, then you’d pay 26561 in interest. In that scenario, your total cost would be $27,901 — in the event that you didn’t add additional items such as extended warranties or pay any additional financing charges. Or, you can pay the full price of $30,000 and then choose a zero percent APR. Assuming no add-on products or fees, you’d have to pay an additional $2,099 in this case than you would pay by taking the cash rebate. Do’s and don’ts of APR-free loans If you’re looking at your options and decide a 0 percent APR auto loan is the best option that you make for yourself, then these do’s and don’ts may assist you with the process. Do

Don’t

the purchase price before you ask for the APR offer. APR the purchase price before you ask for the 0 percent APR.

Accept an unrestricted loan with a high monthly payment that you cannot pay for.

Be preapproved to get an automobile loan before visiting the dealer.

Consider a longer-term loan to reduce your monthly payment if it will cost you more in total.

Make sure you are able to manage the monthly payments.

You can choose a zero percent financing option over a cash-back incentive without comparing the potential overall savings.

Check if the manufacturer has incentives for cash-back which you can use in conjunction with the special financing offer.

Skip the down payment if you can afford one.

The main point to deciding if a 0 percent APR car loan is worth your time is to compare it to the cost of an automobile loan from an external lender and find your true monthly costs. In the case of your particular situation, the deal may not actually save you money. There are a few instances where special financing may not be quite as great as it appears and obtaining it usually requires excellent credit. Make sure you are current on your credit and that interest-free won’t end up costing you more overall.

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Written by the contributing author Michelle Lambright Black is a credit expert with over 19 years of experience. She’s a freelance writer and a certified credit expert witness. Alongside writing for Bankrate Michelle’s work has been published in numerous publications, including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Editor: Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping their readers to take control of their finances by providing precise, well-studied information that breaks down complicated topics into manageable bites.

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