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 choices by providing you with interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct research and compare data at no cost and help you make sound financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this site come from companies that pay us. This compensation could affect how and where products appear on this site, including for instance, the order in which they may appear within the listing categories in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other home lending products. This compensation, however, does not influence the content we publish or the reviews that appear on this website. We do not include the universe of companies or financial deals that may be accessible to you. @VeraNovember/Twenty20
6 minutes read. published 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 is an author on a freelance basis and a certified expert witness in credit. In addition to writing for Bankrate Michelle’s work has been 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 from late 2021. They are committed to helping readers gain the confidence to take control of their finances through providing concise, well-researched and accurate information that breaks down otherwise complex issues into digestible chunks. The Bankrate promises
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They are worth the cost if you can reduce your monthly payment. However, you must have an excellent credit score to qualify. Be sure to keep both the cost-effectiveness as well as the eligibility of your car when driving around for a test.
What exactly is 0% APR? A zero percent APR basically means that you can borrow money for free. The monthly installments you pay back the lender for the money it paid to the dealer, but no money from your pocket goes into the lender’s bank account. This is different from the standard method, in which the lender is charged in exchange for financing. Interest and fees are, in fact, the main ways that lenders earn money. Here’s an illustration of the difference in the monthly costs that a 0 percent APR can bring compared to the more common APR. 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
How does 0% APR work? The idea of financing a car with no interest sounds too appealing to be real. But these financing deals can be a tool automakers can employ to sell more vehicles. Loan providers that offer zero percent financing are called captive finance companies , and are connected to . Some examples of lenders that are captive include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services and more. Therefore, if Ford wants to sell more F-150s due to problems with overstock, it could provide zero-interest loans to certain borrowers through its own financing arm. No-interest financing seems more reasonable on the surface however this isn’t always the situation. If car manufacturers offer 0 percent financing, they could try to make up for “lost” income in other ways. For example, a dealership may push hard to sell you on the spot or with your vehicle. Also, you may have to give up benefits such as rebates which would typically lower your purchase price. How do you qualify for the 0% APR car deal? Zero percent financing deals typically only available to borrowers with excellent credit usually referred to as a credit score of 800 or over. You should do this prior to when you begin looking for financing for your car. Each lender also has its own definition of excellent credit and its qualification requirements can differ from one vehicle to the next vehicle. Because zero APR qualifications differ so widely it is best to contact your local auto dealer ahead of time. You can inquire about the criteria you will need to fulfill to qualify for interest-free financing on a specific car. Aside from your credit score the auto lender will consider other aspects when evaluating the application, including: . Employment background. Verification of income and address. Whatever the condition of your credit -good, bad fair or outstanding, it is important to seek approval to obtain financing from outside sources too. A preapproval is a great way to compare the options available and provide a backup plan if you aren’t eligible for the exclusive offer offered by the automaker. Limits on 0% APR financing Interest-free financing might be a great deal for some people. However, there are a few potential pitfalls you should look out for when considering this type of loan. A limited selection of interest-free financing may only be available for certain kinds of vehicles. First, the car you buy will most likely need to be . Automobile manufacturers also make special financing deals available for vehicle models where there’s a surplus in stock that they need to move. Limited repayment options Based on the offer you’re offered, the repayment options you have with the 0% financing option may be more limited. In most cases you’ll be given less time to repay the loan than you would have otherwise. Of course, there’s nothing wrong with repaying a loan fast, but you should ensure that you can afford the higher monthly payment without straining your budget. A 0% loan vs. bonus cash . Automakers would like you to buy the next car from their business, not a competitor. This is the primary reason the 0% financing offer exists to begin with. To draw new customers, auto manufacturers often offer to buyers. Unfortunately, an auto maker might not let you benefit from both zero percent financing as well as bonus cash. If you’re faced with this situation, you’ll need to determine which savings opportunity is . Tip from Bankrate
Utilizing an application can help you compare 0 percent financing versus bonus cash incentives. Sometimes taking the cash rebate that a dealership offers with an increased loan APR yields better savings overall. In other instances financing at 0 percent could be the best option.
Do you want to take the cash and then refinance it later? You may have to agree to regular financing from the automaker’s captive lender to qualify for certain types of cash incentives. In the event of a loan, it’s possible that you’ll get a better interest rate than you might get through your bank or outside lender. Based on your circumstances and needs, a new auto loan within a couple of months could be a good approach. However, there are some disadvantages to think about first. For instance that having two loans back-to-back — the original loan and one that you refinance it by — could damage your credit rating for a time. Multiple loans can have at least two hard on your credit reports. Adding two loans added to credit reports regardless of whether one is paid off the other, can decrease the average age of accounts on your credit reports. When it comes to credit score, the older the average age of your accounts, the more favorable. Important takeaway
Cash incentives can reduce the amount you need to take out a loan, but refinancing it later for a may affect your credit score and cause it to suffer a temporary drop.
If an offer with 0% APR not worth it? It may be beneficial to forgo specific financing options offered by manufacturers in the following scenarios. The terms of repayment don’t match your budget. Low-interest car loans typically come with shorter finance terms. Based on your income, this might make your monthly installment not affordable. For instance, if a zero percent car loan lasts 4 years but you normally be financing for five years price differs and can be significant. Average rates
0% APR
Amount to be financed
$25,000
$25,000
A loan term
5 years
4 years old
APR
4%
0%
Monthly payment
$460
$520
You can observe, for a $25,000 car loan by the manufacturer for four years, your monthly payments is approximately $520. A $20,000 car loan that is financed over five years at a 4 percent interest rate will require an annual payment of $460. It is possible to make use of an online auto loan calculator to perform the math for your potential loan. Financial experts generally recommend that you limit your monthly car payments to 20% or less of your take-home income per month. Some experts recommend you pay 10 percent of your gross income. You’re tempted to purchase an expensive car. You should not increase your auto budget just to be eligible for a special financing. If you’re planning to pay $10,000 cash for a , taking on an auto loan with a $30,000 price charge just to get the benefit of financing with no interest is probably not a wise financial move. Cash rebates can provide you with additional savings. Cash-back incentives typically aren’t available to those who are using the manufacturer’s financing. If you look at the numbers and find that cash rebates can provide you with a greater savings opportunity, a 0 percent financing offer isn’t worth the cost. Imagine you can take advantage of a cash-back offer on a brand new car purchase. For a new car that has an estimated price of $30,000, that incentive could bring the price of your purchase down to $25,250. If you financed $25,250 at a 4 percent interest rate over five years, then you’d have to pay 26561 in interest. In that scenario, your total cost would be $27,901 — provided you don’t add on extra products like extended warranties or pay any additional financing charges. Or, you can pay the full price of $30,000 and choose a zero percent APR. In the event that there are no additional charges or products, you’ll be paying $2,099 more in this case than you would get if you took the cash rebate. Do’s and Don’ts of 0% APR deals If you’ve analyzed your options and decide a 0 percent APR auto loan is the best option that you make for yourself, then these tips and don’ts can aid you in your decision-making. Do
Don’t
the purchase price before you apply for the APR offer. APR offer.
You can take an unrestricted loan with a significant monthly installment that you are unable to pay for.
Be pre-approved for an auto loan before you visit the dealer.
Consider a longer-term loan to reduce the monthly cost of your loan in the event that it will cost you more in the long run.
Confirm that you can afford the monthly payment.
Choose 0 percent financing over a cash-back incentive without comparing the potential savings.
Find out if the manufacturer offers incentives for cash-back that you can mix with the special financing offer.
Don’t pay the downpayment if you can afford one.
The bottom line The key to determine if a 0 percent APR car deal is worth your time is to assess it with the cost of an automobile loan from an outside lender and determine your actual monthly cost. Based on the circumstances the deal might not be a good deal for you. There are also a few situations where special financing isn’t quite as great as it appears and getting it requires a high credit score. Be sure to check the current rates and ensure that you don’t have to pay interest if it will cost you more in total.
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Written by Contributing author Michelle Lambright Black is a credit expert with more than 19 years of experience, a freelance writer and a certified credit expert witness. Alongside writing for Bankrate Michelle’s writing is published in numerous publications, including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers to take control of their finances by providing concise, well-studied and well-researched content that breaks down complicated topics into digestible chunks.
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