0% APR car deals: Are they worth it?

Many manufacturers and dealerships advertise no-interest car loans. These loans are offered through captive finance companies, which the manufacturer owns, and are used to attract prospective buyers.

As car loan interest rates soared over the past few years, no-interest car loans became a better and better deal. According to a recent Experian study, the average auto loan APR (annual percentage rate) for borrowers with excellent credit scores is 5.08 percent for new cars.

However, it is difficult to qualify for a 0 percent annual percentage rate (APR) without excellent credit, and it tends only to be worth it if you can save money on your monthly payment.

What is 0% APR?

A 0 percent APR or interest-free auto deal essentially means you borrow money for free. Your monthly payments reimburse the lender for the money it paid the auto dealer, but no extra money from your pocket goes into 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 primary ways lenders make money.

Here’s an example of the difference in monthly cost a 0 percent APR could make versus the average APR for a new car.

How does 0% APR work?

Financing a car interest-free almost sounds too good to be true. But these financing deals are a tool auto manufacturers can use to sell more vehicles.

Lenders offering 0 percent financing are known as captive finance companies and are linked to auto manufacturers. Some 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 due to overstock issues, it might offer zero APR loans to select borrowers through its own financing arm.

No-interest financing seems more affordable on the surface, but that’s not always the case.

When auto manufacturers offer 0 percent financing, they may try to make up for “lost” income in other ways. For example, a dealership may push hard to sell you add-on products, like extended warranties or gap insurance, with your vehicle. You also might have to forgo benefits like rebates that normally bring down your purchase price.

When to get 0% APR financing

No-interest financing is a good choice if you plan on financing a new vehicle. Manufacturers typically don’t offer it on base models, so you’ll pay for extra features.

Come to the dealership with a preapproved financing offer from a lender. By doing this, you can calculate how much you’ll save on interest with 0 percent financing.

If you can afford the payment and know you’ll save a few thousand on a car you want to buy, no-interest financing is the way to go. Otherwise, consider it carefully alongside other financing options.

Struggling to decide between a rebate and a 0 percent APR deal? Try Bankrate’s rebate vs. low-interest car payment calculator.

Limits of 0% APR financing

Interest-free financing might be a great deal for some borrowers. Still, there are a few potential pitfalls you should look out for when considering this type of financing.

• Limited selection: Interest-free financing may only be available for certain types of vehicles. First, the car you purchase will almost certainly need to be new. Auto manufacturers also tend to reserve special financing offers for vehicle models where there’s a surplus in stock that they need to move.
• Limited repayment options: Depending on the offer, your repayment options with 0 percent financing may be more limited. Often, you’ll have less time to repay the loan than you might have otherwise. Of course, there’s nothing wrong with repaying a loan quickly, but you should be sure you can afford the higher monthly payment without straining your budget.

Steps to get a 0% APR car loan

If you’re considering a no-interest car loan, here’s how to move forward and tips to strengthen your approval odds.

1. Make sure your credit is excellent

Lenders want to ensure you have a near-perfect history of making payments and handling your debt before offering you no-interest financing. An excellent credit score — 781 or higher — will get you the best deal on financing, but you can still qualify for a competitive interest rate if your score is 670 or higher.

A steady source of income is equally important. These loans are often only available for shorter loan terms — up to 48 months — resulting in high payments. The lender will want to know you can comfortably afford your car payments and that there’s little or no chance you’ll default on the loan agreement.

2. Save up for a down payment

You may need a larger down payment. Even if you aren’t required to put money down to qualify for financing, many lenders require a hefty down payment to qualify for a 0 percent interest auto loan.

Lenders also want to see a low debt-to-income (DTI) ratio. A low DTI confirms your income will cover this new debt atop other payments you may be making.

3. Research available 0% APR car deals from manufacturers

Unfortunately, you won’t find no-interest auto loans through traditional banks, credit unions or online lenders. You’ll need to do some legwork to identify auto manufacturers with captive finance companies offering these deals.

If you prefer particular manufacturers, visit their websites and view the page listing current financing offers. Look for deals from at least three manufacturers before moving to the next step. You can also search for deals by model or contact the dealer directly before shopping for vehicles to learn more.

4. Negotiate and apply for the loan

Zero percent financing is just a small portion of the car-buying process. You should still negotiate the car’s price like any other buyer.

If possible, avoid disclosing your interest in a no-interest car loan before negotiating the purchase price. Remember, the dealer wants to maximize their profits on these deals. So, disclosing your intentions of applying for a 0 percent auto loan before agreeing on a price point could hurt your chances of truly getting the best deal on a new ride.

Dealerships may also press you to opt for added features, gap insurance or an extended warranty. These are optional, so be firm if you don’t want them.

Once you’ve negotiated the purchase price of the vehicle with the dealer, the next step is to formally apply for financing.

Do’s and don’ts of 0% APR deals

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

The bottom line

The key to deciding if a 0 percent APR car deal is worth it for you is to compare it against an auto loan from an outside lender and find your true monthly cost. Depending on your circumstance, the deal may not truly save you money. There are also a few situations where special financing isn’t as good as it seems, and qualifying often requires excellent credit. Check current auto loan rates and ensure interest-free won’t cost you more overall.