APR-free car deals are they worth it? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. We also allow you to conduct research and compare data for free to help you make sound financial decisions. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies that compensate us. This compensation can affect the way and where products appear on the site, such as such things as the sequence in which they appear in the listing categories and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other products for home loans. This compensation, however, does affect the information we provide, or the reviews you see on this site. We do not contain the vast array of companies or financial offerings that could be available to you. @VeraNovember/Twenty20
6 minutes read. The publication was published on March 02, 2023.
Writer: Michelle Black Michelle Black Written by Contributing writer Michelle Lambright Black is a credit expert with over 19 years’ 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 Edited and written by Auto loans Editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to take control of their finances through providing precise, well-researched, and well-researched data that breaks down complex topics into manageable bites. The Bankrate promises
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They’re worth it if you save money on your monthly payments. However, you must have good credit score to be eligible. Make sure you keep the cost-effectiveness of your loan and your eligibility in mind while taking a test drive.
What exactly is 0% interest? A zero percent APR simply means that you take out a loan for no cost. Your monthly payments pay your lender for the amount that it paid to the dealer, but no extra money from your pocket goes to the bank account of your lender’s bank account. This is different from the standard way of doing business, where the lender charges to finance. Interest and fees are, in fact, the principal ways lenders earn money. Here’s an illustration of the difference in monthly cost a 0 percent APR might bring in compared to an APR that is more typical. Average rate
0% APR
Amount to be financed
$27,564
$27,564
Loan term
60 months
60 months
APR
5.47%
0%
Monthly payment
$478
$418
Total cost
$28,704
$25,064
What exactly is 0% APR? How does it work? A car loan that is interest-free sounds too good to be true. But these financing deals can be a tool manufacturers of automobiles can utilize to make more sales. The lenders that provide zero percent financing are referred to as captive finance firms and are connected to . Examples of lenders that are captive include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. If Ford wants to sell more F-150s due to overstock issues, it might provide zero-interest loans to certain borrowers through its own financing division. Zero-interest financing may seem to be more affordable in the first place, but this isn’t always the case. If car manufacturers offer 0 percent financing, they might try to cover “lost” revenue in other ways. For instance, a dealer may try to get you on the spot or in conjunction with your vehicle. You also might have to give up benefits such as rebates, which normally bring down your cost of purchase. How to qualify for a 0% APR car deal Zero percent financing deals are typically reserved for those with excellent credit usually referred to as having a rating of 800 and over. You should do this prior to when you make any purchases for financing for your car. Each lender has its own definition of excellent credit, and qualification requirements could vary from vehicle to vehicle. Because the zero APR qualifications differ in a wide range the best option is to call the auto dealership in advance. Find out what requirements you have to satisfy to be eligible for interest-free financing on a specific car. In addition to your credit score, an auto lender will consider other aspects when evaluating your application, for example: . Employment history. Income and address verification. No matter the state of your credit score — good, bad, fair or excellent — it is important to seek approval to seek out financing from other sources as well. Preapproval can help you compare your options and offer a backup plan if you aren’t eligible for the exclusive offer offered by the automaker. Limits of zero-interest financing could be a good deal for some people. However, there are a couple of potential issues to be aware of when you are considering this type of financing. The limited options for interest-free financing may only be available for certain types of cars. First, the car you purchase will probably require . Automobile manufacturers also reserve special financing offers for models of vehicles when there’s surplus stock that must be moved. Limited repayment options Based on the deal the repayment options for 0 percent financing may be restricted. In most cases you’ll be given less time to pay off the loan than you would have otherwise. Of course, there’s nothing wrong with paying back an loan quickly, but you should be sure that you can manage the greater monthly payments without straining your budget. A 0% loan or. bonus cash . Automakers would like you to buy your next car from their business and not from a rival. This is the primary reason that 0% financing deals are offered at all. In the interest of attracting new customers, auto makers frequently offer buyers. Unfortunately, an auto maker might not let you take advantage of both the 0% financing rate and the bonus cash. If you’re in this issue, you’ll have to decide which savings opportunity is . Tip from Bankrate
Utilizing an application can help you compare zero percent financing with bonuses in cash. Sometimes, using the cash rebate that a dealership offers with the higher loan APR yields better overall savings. In other cases the financing with 0% interest rate could be the best option.
Should you take the cash and then refinance later? You may have to agree to standard financing through the automaker’s captive lender to qualify for certain types of cash incentives. In the exchange, there’s a possibility that you’ll be offered a greater interest rate than get through your bank or outside lender. Based on your circumstances and needs, a new auto loan within a couple of months might be an effective approach. However, there are a few disadvantages to think about first. In particular that having two loans reverse-to-back — the original and the one you refinance it with — can damage your credit rating for a time. A combination of loans will cause at minimum two marks appearing on your credit reports. Adding the two loans to your credit report even though one of them pays on the other can decrease your average age for your accounts that appear on credit report. Regarding credit scoring, the older the average age of your accounts, the better. Important lesson
Cash incentives may reduce the amount you have to take out a loan, but refinancing later to repay it could affect your credit score and cause it to suffer a temporary drop.
When is an APR rate of 0% not worth it? It might make sense to forgo special financing deals from manufacturers in the following scenarios. The terms for repayment aren’t in line with your budget. Low-interest auto loans often have shorter terms for financing. In the case of your income, a might make your monthly installment not affordable. For instance, if the 0 percent car loan lasts over four years and you normally credit for five years in the future, then that cost difference can be meaningful. The average rate
0% APR
Amount financed
$25,000
$25,000
The term “loan”
5 years old
4 years
APR
4%
0%
Monthly payment
$460
$520
As you can see, on an automobile with a $25,000 loan from the manufacturer for four years, your monthly installment is approximately $520. A $25k car loan with a five-year repayment at a 4-percent interest rate will require a monthly payment of $460. It is possible to use an online auto loan calculator to perform the math for your prospective loan. Experts in finance often suggest that you limit your monthly car payment to 20 percent or less of your monthly take-home pay. Experts suggest you pay 10% of your gross income. It’s tempting to buy a more expensive vehicle You shouldn’t raise your budget for autos just to qualify for special financing. If you’re planning to buy a car for $10,000 in cash a , taking on a new auto loan with a $30,000 price charge just to get the benefit of no-interest financing probably isn’t a wise financial move. Cash rebates provide additional savings. Cash-back incentives typically do not apply to customers who use the manufacturer’s special financing. If you analyze the numbers and you find that cash rebates offer you a bigger savings opportunity, a 0 percent financing rate isn’t worthwhile. Imagine you can take advantage of a $4,750 cash-back offer on a brand new car purchase. On a new vehicle with an estimated price of $30,000 this incentive could bring the cost of purchase to $25,250. If you were to finance $25,250 with the rate of 4 percent in five-year terms, you’d be paying $2,651 in interest. In that scenario, your total cost would be $27,901 — in the event that you didn’t include additional products such as extended warranties, or incur other financing fees. Or, you can pay the full $30,000 purchase price and then choose a zero percent APR. If you don’t include any additional items or charges, you’d still pay $2,099 more in this case than what you’d get if you took the cash rebate. Do’s and don’ts of APR-free deals If you review the options available and determine the 0% APR auto loan is the best option to make, the following do’s and don’ts could help you navigate the process. Don’t
Don’t
the purchase price before you request the purchase price before you ask for the APR offer.
You can take an unrestricted loan with a large monthly payment that you cannot manage to.
Be pre-approved for an auto loan prior to visiting the dealer.
Consider a longer-term loan to lower your monthly payments even if it costs you more in total.
Make sure you are able to manage the monthly payments.
Choose 0 percent financing over cash-back incentives without comparing the potential savings.
Check if the manufacturer has incentives for cash-back which you can use in conjunction with the special financing offer.
Don’t pay the downpayment when you have the money to make one.
The most important thing to determining if a zero percent APR car loan is worth it for you is to compare it to an auto loan from an external lender and find your true monthly cost. Based on the circumstances, the deal may not actually save you money. There are also a few instances where special financing may not be as good as it seems, and qualifying often requires a high credit score. Check current and make sure interest-free won’t end up costing you more overall.
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Written by a contributing Writer Michelle Lambright Black is a credit expert with over 19 years experience. She’s freelance writer, and certified credit expert witness. In addition to writing for Bankrate, Michelle’s work is included in numerous publications such as 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 editing and writing for Bankrate since the end of 2021. They are passionate about helping readers to manage their finances with concise, well-studied and well-researched content that break down complex topics into manageable bites.
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