0% APR car deals: is it worth it?

With the average monthly payment for new cars near $700 and used around $525, according to Experian data from the third quarter of 2022, finding a bargain is important. And signing up for a 0 percent APR car deal is one way to save money on your next car purchase.

Many car manufacturers offer interest-free car loans to attract new and well-qualified customers and sell more vehicles. However, when buying a new vehicle, you should always proceed with caution, even if there is a zero APR offer on the table. In some cases, getting an auto loan from an outside lender might work out better in the long run.

Are 0% APR offers worth it?

They are worth it if you save money on your monthly payments. But you need excellent credit to qualify. Consider both its cost-effectiveness and your eligibility when you go for a test drive.

What is 0% APR?

A 0 percent APR or no-interest car deal essentially means you’re borrowing money for free. Your monthly payments reimburse the lender for the money you paid the car dealer, but there is no extra money out of your pocket in 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 main ways lenders make money.

Here’s an example of the difference in monthly cost that a 0 percent APR could make compared to a more standard APR.

How does 0% APR work?

Interest-free car financing almost seems too good to be true. But these financing offers are a tool that automakers can use to sell more vehicles.

Lenders that offer 0 percent financing are known as captive finance companies and are tied to the automakers themselves. Examples of captive lenders include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. So if Ford wants to sell more F-150s because of overstocking issues, it could offer zero-APR loans to select borrowers through its own financing arm.

The story continues

Interest-free financing seems more affordable at first glance, but this is not always the case. When automakers offer 0 percent financing, they can try to make up for the “lost” revenue in other ways. For example, a dealer may push hard to sell you additional products, such as extended warranties or gap insurance, with your vehicle. You may also have to forgo benefits such as discounts that would normally lower your purchase price.

How to qualify for a 0% APR car offer

Zero percent financing offers are generally reserved for borrowers with excellent credit, usually classified as a credit score of 800 or higher. You’ll want to review your credit reports before you start shopping for auto financing. Each lender also has its own definition of excellent credit, and qualification requirements can vary from vehicle to vehicle.

Since zero APR qualifying standards vary widely, it’s best to call the car dealership ahead of time. Ask what criteria you must meet to qualify for interest-free financing on a particular vehicle. Aside from your credit score, an auto lender may consider additional factors when reviewing your application, such as:

Regardless of the status of your credit (good, bad, fair, or excellent), you should also take the time to seek pre-approval from outside financing sources. Pre-approval can help you compare your options and provide you with a backup plan if you don’t qualify for the automaker’s exclusive offer.

Financing limits TAE 0%.

Interest-free financing can be a great deal for some borrowers. However, there are some potential pitfalls that you should be aware of when considering this type of financing.

• Limited selection: Interest-free financing may only be available for certain vehicle types. First, the car you buy will almost certainly have to be new. Automakers also tend to reserve special financing deals for vehicle models where there’s a surplus in stock that they need to move.

• Limited Repayment Options: Depending on the offer, repayment options with 0% financing may be more limited. Often, you will have less time to repay the loan than you would otherwise have. Of course, there’s nothing wrong with paying off a loan quickly, but you should make sure you can afford the higher monthly payment without straining your budget.

0% financing vs cash bonus

Automakers want you to buy your next vehicle from their company, not a competitor. This is one of the main reasons why 0% financing offers exist in the first place. In the interest of attracting new customers, car manufacturers often offer cash bonuses to buyers.

Unfortunately, an automaker may not allow you to take advantage of both 0 percent financing and bonus cash. If you’re faced with this dilemma, you’ll need to decide which savings opportunity is the best deal.

Bank tip

Using an auto financing calculator can help you compare 0 percent financing with bonus cash incentives. Sometimes taking the cash discount offered by a car dealership along with a higher APR on the loan offers a better overall savings. In other cases, 0% financing could be the clear winner.

Should you take the cash and refinance later?

You may have to accept standard financing through the automaker’s captive lender to qualify for certain types of cash incentives. In return, there’s a chance you’ll receive a higher interest rate than you could through your bank or an outside lender.

Depending on your situation, refinancing your new auto loan within a few months can be an effective strategy. But there are some drawbacks to consider first. In other words, taking out two back-to-back auto loans, the original and the refinance, could hurt your credit for a while.

Multiple loans will result in at least two hard credit inquiries on your credit reports. Adding two loans to your credit reports, even though one pays off the other, can lower the average age of the accounts on your credit reports. When it comes to credit scores, the older the average age of your accounts, the better.

key food

Cash incentives can lower the amount you have to borrow, but refinancing later to get a better rate can take a temporary hit to your credit score.

When is a 0% APR offer not worth it?

It might make sense to forgo special manufacturer financing offers in the following situations.

The repayment terms do not fit your budget

Low interest car loans usually have shorter finance terms. Depending on your income, a shorter loan term could make your monthly payment unaffordable.

For example, if the 0 percent car loan is for four years, but you would normally finance for five years, the difference in cost can be significant.

As you can see, on a $25,000 car loan through the manufacturer over four years, your monthly payment would be about $520. A $25,000 car loan financed over five years at an interest rate of 4% requires a monthly payment of $460. You can use an auto loan calculator to do the calculations for your potential loan.

Financial experts often recommend keeping your monthly vehicle payment at 20 percent or less of your monthly pay. And some experts suggest you limit your car payments to 10 percent of your gross income.

You are tempted to buy a more expensive vehicle

You shouldn’t decide to increase your auto budget just to qualify for special financing. If you were planning on paying $10,000 cash for a used vehicle, taking out a new auto loan with a price tag of $30,000 just to take advantage of interest-free financing probably isn’t a smart financial move.

Cash rebates give you more savings

Cashback rebates often do not apply to buyers using special manufacturer financing. If you crunch the numbers and cash discounts give you a bigger savings opportunity, a 0 percent finance deal wouldn’t be worth it.

Imagine you can take advantage of a $4,750 cash back offer on a new vehicle purchase. On a new vehicle priced at $30,000, this incentive could bring the purchase price down to $25,250. If you financed $25,250 at 4 percent interest over five years, you would pay $2,651 in interest. In this scenario, your total cost would be $27,901, as long as you don’t add additional products like extended warranties or incur any other financing fees.

Alternatively, you can pay the full purchase price of $30,000 and opt for a 0 percent APR. Assuming no additional products or fees, you’ll still pay $2,099 more in this scenario than you would with the cash discount.

The dos and don’ts of 0% APR offers

If you review your options and decide that a 0 percent APR auto loan is the right choice for you, these dos and don’ts can help you navigate the process.

The bottom line

The key to deciding whether a 0 percent APR auto offer is worth it is to compare it to an auto loan from an outside lender and find your actual monthly cost. Depending on your circumstances, the deal may not actually save you money. There are also some situations where special financing isn’t as good as it sounds, and qualifying often requires excellent credit. Check current car loan rates and make sure that interest-free won’t end up costing you more overall.