Are 0% Auto Loans Too Good to Be True?

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by Taylor K. Medine

Is a 0% APR auto loan tempting you to buy a new car? Here’s what you need to know before signing.

While shopping around for car deals and comparing car loans, the words “0% auto financing” or “0% APR auto loans” may catch your attention.

Although it sounds like it might be too good to be true, it is indeed possible to borrow money for your next SUV or hatchback without an interest rate attached to the loan.

This guide will break down how 0% APR car loans work, what it takes to qualify, and disadvantages to consider before signing on the dotted line.

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What Is a 0% Apr Car Loan and How Does It Work?

A 0% Annual Percentage Rate (APR) car loan doesn’t have an interest rate. Usually, borrowing money isn’t free. The bank or credit union you borrow money from adds an interest rate to the loan, which is how financial institutions make money from lending you cash.

In the case of the 0% APR car loan, you don’t have to pay interest. Instead, your payments go directly to paying down the principal. This can work out to a nice chunk of savings. Considering the average rate on a new car loan from a finance company is 4.80%, you could potentially save thousands of dollars over the loan term, depending on the loan balance.

Besides not having an interest rate, 0% APR car loans work much like your standard car loan. You may or may not be required to bring a down payment to the table. Although, you may want to bring a down payment to the table anyway since cars depreciate. If you get into an accident and you owe more on the loan than the car is worth, you could be on the hook for the difference.

The loan contract will state the loan terms and fees. If you agree to the terms, you’ll make installment payments until the loan is paid off.

Who Offers 0% APR Loans? 

Typically, zero-interest auto financing deals are offered by the car manufacturer through dealerships and not offered by your neighborhood credit union or bank. That’s because there’s no real incentive for financial institutions to offer such a deal since they aren’t making money from the car sale.

Automakers and dealerships, on the other hand, use zero-interest financing as a marketing tool to sell cars — essentially, the 0% APR promotion is used to drum up business. Since 0% APR car loans are often an incentive for new cars, you may not find this type of offer if you’re in the market for a used one.

Dodge, Mazda, Kia, Subaru, and Toyota are examples of carmakers who might offer 0% financing promotions on certain vehicles. However, promotions start and expire on a revolving basis.

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Disadvantages of 0% APR Loans 

The advantage of a 0% APR loan is clear: You don’t have to pay interest on the loan, which can save you money. But the zero-interest loan does come with a few potential disadvantages.

Here are some things to consider:

  • It may be a short-term loan: With a standard car loan, you might be able to choose from a loan term of 24 to 84 months. A 0% APR loan may only be available for select loan terms, such as up to 60 months. Loan terms vary from one car retailer to the next.
  • Monthly payments may be sky-high: Payments could be higher on a short-term loan, especially if you buy a car with a high price tag. If you borrow $30,000 for a new Toyota Camry, you could be looking at payments of $833 per month with a loan term of 36 months. Those payments could be a real budget buster.
  • The rebate may be off the deal table: If you take a 0% APR deal, you may not be able to qualify for other incentives like the rebate. A rebate is cash back that the automaker gives you for buying a car. Before assuming 0% APR will offer you the most savings, compare other scenarios to figure out which will keep the most money in your pocket.
  • 0% APR financing may not be available for used cars: If you have a slim budget, you may not be able to swing a new car right now even with the 0% APR offer. You’ll have to consider whether taking a 0% APR deal is worth opening up that budget.
  • Credit requirements are often strict: People with bad credit might find that this deal is off the table. You could consider repairing your credit to better your chances of getting approved for a zero-interest loan. Even if you don’t end up getting approved, working on your credit can help you land a low-interest rate on another loan. We’ll talk more about qualifying criteria next.

How to Qualify for a 0% APR Car Loan

Credit score requirements can vary, but very good credit (or even excellent credit) may be necessary to qualify for a 0% APR financing deal.

For example, Toyota states: “Only very well-qualified buyers will qualify for the lowest APR.” The websites for Mazda, Kia, and Subaru also list “well qualified” as the requirement for the current 0% APR auto financing promotions on new cars. On the FICO scale, 740 to 799 is a very good score, and 800+ is considered excellent. 

Why is the credit criteria so high? 

Since the company financing your car is letting you borrow money without an interest rate, they want to be sure that you’re unlikely to default on the loan. Having a high credit score means you’re creditworthy and more likely to keep up with payments over the life of the loan.

If you’re trying to qualify for a 0% APR loan, here are a few steps that can help better your chances of getting approved:

  • Review your credit score: Experian offers a free FICO score if you sign up for credit monitoring. You can also get a free VantageScore from sites like Credit Karma, Credit Sesame, or Credit.com.
  • Check your credit history: Pull your credit report from all three credit bureaus — Experian, Equifax, and TransUnion — to see what factors are impacting your credit score. You can usually get one free credit report from each bureau annually. But because of the pandemic, you can get free weekly reports from AnnualCreditReport.com until April 2021. Take advantage of that while it lasts!
  • Ask for a goodwill adjustment: If you slipped up and missed a payment here or there, you can reach out to the creditor and ask if they can remove the negative record. They aren’t required to do so if the record is accurate. But you might get a courtesy removal if you’ve recently had a record of on-time payments or if you agree to pay off your balance in full.
  • Tackle your debt balances: Your credit utilization is part of the second most important factor that impacts your credit score, “amounts owed.” Paying off balances on your credit cards can decrease your credit utilization ratio making your application look more appealing to finance companies.

Learn more about ways to build credit in our guide to seven-ish ways to improve your credit score.

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Fine Print to Watch Out For

Despite there being no interest, 0% auto financing isn’t always the most affordable way to buy a car.

Before taking a 0% APR financing offer, the Consumer Financial Protection Bureau (CFPB) recommends shopping for loans with credit unions and banks during the car buying process to see if securing your own financing and taking a rebate could be more affordable.

Also, keep an eye out for a bait and switch. The Federal Trade Commission (FTC) warns that 0% APR car loan promotions may only be for loans of a certain loan amount, and the loan amount you need to purchase your new car may be higher than that limit.

Zero interest doesn’t necessarily mean 0% APR, and those three letters (APR) are important. This type of interest rate factors in the fees. An interest rate without those letters means fees aren’t calculated into the annual cost, so read the fine print.

Finally, 0% APR auto financing deals may only be available on certain makes and models, so your dream car — or the new car that fits into your budget — may not qualify.

Compare Multiple Loan Options Before Sealing the Deal

A dealership promotion could be tempting enough to get you on the lot, but that doesn’t mean you have to leave the lot with a new vehicle. If you’re thinking about pursuing a 0% APR loan offer, consider the short-term financial responsibility and not just the long-term interest savings.

Since the promotional financing is usually offered for new cars and the loan term may be short, you could be looking at a monthly payment that’s much higher than what you planned for.

A car is a four-figure or five-figure purchase that you could be paying off for the next several years, so compare multiple loan options until you find the most cost-effective one.

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