Is 0 interest rate good for a car?

If you've ever bought a car, you know it can be a major financial event. Depending on the type of car you're looking for, you might spend a significant portion of your yearly paycheck. Feeling daunted? Never fear. A wide number of money-saving incentives can help you find a great value deal.

One such incentive is the 0% APR car loan. If you're aiming to pay back your car in monthly installments, how does getting that auto loan for free sound? That's exactly what you get when you find one of these zero-interest car loans. Many dealerships are currently offering qualified customers the opportunity to save money on monthly payments by avoiding interest altogether.

While this type of low-interest auto loan can be a dream come true, it also has its limitations. Strict qualification requirements might mean some individuals interested in a 0% APR loan can't get one.

Meanwhile, the short repayment periods and limited car selection might mean those who can get one decide against the opportunity. If you're wondering whether a zero-interest loan is a good option for you, the best way to decide is to learn what it is, how it works, and the drawbacks you might encounter.

A 0% APR, or annual percentage rate, loan is one where the buyer can pay the loan back over a long period without incurring interest. In other words, the interest rate is 0%. These are also known as interest-free loans or no-interest loans. This means every time you make a monthly payment, you're reimbursing the seller directly for your purchase without losing money to the lender.

It's obvious why 0% APR loans are beneficial to buyers: They allow you to avoid costly loan interest payments. This can be useful if you're aiming to pay off your vehicle over many months or when you're making high payments. However, to fully understand 0% APR loans, it's helpful to consider why they're useful to the seller as well.

Zero percent APR loans can be useful tools for sellers because they can use them to sell more vehicles. You're most likely to find a 0% APR loan offer from a captive finance company. This type of company is directly connected to an auto manufacturer.

For example, sellers such as Toyota and Ford have their own financial services or credit company through which a buyer can receive a loan. This means the automotive company can still benefit from a valuable sale even without earning extra credit on the loan.

Here are other ways a dealership or manufacturing company might benefit from offering an interest-free loan:

Not everyone can qualify for an interest-free loan. In fact, lenders or dealerships might review several requirements, including:

The exact qualification requirements might differ from lender to lender, so do your research before you begin negotiations to find out if you qualify. If it doesn't say on the lender or dealership website what qualifies you to receive a 0% APR loan, you can call to ask.

The qualification requirements might also vary depending on the vehicle you'd like to buy, so it's a good idea to call with a specific model in mind. You can then research your own credit score and compare. If you meet the requirements, you're good to go.

You can get pre-qualified for a 0% APR loan before you go to the dealership in person. This can help you avoid interest-free loan promises that are more marketing gimmicks than anything else and connect with sellers who might truly give you the best value on your new car.

You can also review your preapproval options from outside lenders and financing options. This might give you better context for your loan options and prepare you to negotiate for the best possible deal when you arrive at the dealership.

Zero percent APR deals do come with a few important limitations and drawbacks. The good news is once you know those limitations, you can make informed decisions about each purchase decision and whether a 0% APR deal makes sense for your needs.

The dealership might offer 0% APR loans only on certain cars, which they usually determine by whether they think they'll make that money back with the sale. This means you might face limitations in your car selection if you decide a 0% APR loan is a must-have.

Specifically, you might find you need to purchase a new car or a certain model or trim level. Used car options with interest-free loans might be difficult to come by.

The repayment plan for a no-interest loan might differ from a traditional one. For example, these types of loans typically have quicker repayment timelines. Without the benefit of accruing interest, the dealership is more likely to benefit from getting your payment back quickly. The specifics of the repayment timeline usually depend on the dealership and your specific offer.

If you have the resources to pay back an auto loan quickly, great! However, if you think you might need to pay back the loan over many months or years, a 0% APR loan might not be the one for you.

While a 0% APR loan can save you from costly interest payments, it doesn't protect you from other expenses the dealership or seller might add to your final purchase price.

In fact, if a dealership offers an interest-free loan, it might plan to make back some of that money by adding fees for special features, maintenance, or insurance. Other so-called hidden dealer fees to watch out for include:

To avoid unnecessary additional costs, do your research beforehand. You can look into traditional car deal add-ons and decide for yourself whether they seem worth the price. That way, you'll arrive at the dealership well-informed and ready to negotiate.

Speaking of negotiation, remember to advocate for yourself and what you want when deciding the final price of the car, and read everything you sign carefully to identify additional costs.

Interest-free loans are just one of a handful of incentives you might come across during your car purchase experience. A bonus cash rebate is another. Understanding how other types of incentives stack up against interest-free loans can help you decide which deal to pursue.

Like an interest-free loan, a cash rebate is a tool a dealership might use to entice customers to do business.

This type of offer usually involves the automaker giving the buyer of a new car cash, using the dealership as an intermediary. Other names for bonus cash rebates include:

The buyer can then put this cash toward their car down payment, potentially lowering the overall price of the vehicle.

Rebates and 0% APR loans share several aspects, including:

The main differences between 0% APR loans and rebates are:

Most dealerships limit customers to either a 0% APR car loan or the opportunity for bonus cash. By taking the loan, you might lose out on a great bonus cash rebate deal, and vice versa. To make sure you're getting the best value for your money, calculate your payment totals for each deal and see which one is better.

Now that you understand what a 0% APR loan is and how it compares to other incentives, you might wonder if it's the best loan option for your purchase. You can ask yourself a series of questions to find the answer.

First, figure out whether the repayment terms work with your budget and timeline. Specifically, think about whether you're equipped to handle high a monthly payment.

Based on the repayment timeline, calculate how much you'll have to pay each month. You can compare this number with your monthly income and any other financial obligations to ensure you can make it work.

As we've discussed, 0% APR car loans are far from the only type of incentive available. When deciding if this is the best financial option for you, it might help to consider all your options. Beyond bonus cash rebates, you might explore lease deals, other financing deals, and loyalty programs.

Before getting too caught up in the financial intricacies, make sure you consider what type of car you want. Depending on your answer, you might benefit from a different financing option.

For example, if you're looking for a used car, this might not be the strategy for you. Likewise, if you notice all the cars that come with the 0% ARP guarantee are more expensive than your budget allows, that might be a sign to let it go.

Here are some answers to common questions about zero-interest car loans:

Yes, it is possible to get a 0% interest rate loan when you buy a car. In fact, it is a common financial incentive in the automotive sales industry. You might even find opportunities to get a 0% APR loan with no money down if you qualify for both offers.

Whether a 0% APR deal is a good idea depends on your specific situation. If you're interested in buying a brand-new car and have the funds to make high monthly payments, it might be a good deal.

If you're interested in a used car or if a different incentive better fits your financial situation, you should probably pass on a 0% APR opportunity.

Sometimes, you might see deals that include 0% APR for a certain period. These are usually promotional offers. If you agree to this type of deal, you won't pay interest on your loan for the number of months the deal specifies.

For example, if the deal includes 0% APR for 15 months, that means your repayments will be interest-free for 15 months. After that, you might have to pay interest.

The exact credit score you might need to qualify for a 0% APR loan varies depending on your situation. Many lenders require a minimum score of at least 700. Others require excellent credit scores, such as 720, 750, or even 800.

That’s how dealerships rope you in . . . with the flashy promise of a nice car without all the extra strings attached. But when it comes to buying a car, the only way to do it without strings attached is to pay cash. (Psst—cash is always king.) We’re going to break down the basics of zero percent financing: what it is, how it works, who qualifies for it, and how to live without it.

Zero percent financing is a loan that doesn’t charge interest (for a period of time). At best, it’s a fancy marketing tactic dealerships (and other businesses) use just to get people in the door. And at worst, it’s a loan that offers you the opportunity to buy something you can’t afford with money you don’t have. This tactic is a great way to get people to purchase on the spot—with seemingly no consequences (at least up front).

The interest rate on this type of loan usually stays at 0% for anywhere from six months up to a few years. But there’s no such thing as a free ride, right? After the promotional period ends, the loan balance must be paid at a much higher interest rate.

Let’s say you test-drive that new-to-you Ford Explorer and the salesman asks you to head over to his desk for a “little chat.” You know what that means. He says that for the low, low price of $14,500, that pretty black Explorer is all yours. And to sweeten the deal, he says you can get it with zero percent financing for 14 months—if you qualify, of course (more on that later).

Sounds pretty awesome, right? Well sure, on the surface. People want to pay for interest as much as they want to pay for shipping (and no one likes paying for shipping). Car loans with zero percent financing are advertised as an awesome deal for you, but it’s the dealership who’s really benefiting. They use offers like this to drive sales on a slow-selling model or help make room for new inventory.

You might be thinking, What’s so wrong with that? Well, what I don’t want you to think is that zero percent financing is a screaming deal. Or that it’s free. Listen to me closely: Nothing is free. When it comes to zero percent financing, you’re actually paying more than you should in three different ways:

Most zero percent financing “deals” are only offered on cars selling at full price. That means you can’t take advantage of a sale and you can’t negotiate. Some dealerships even mark up the price because they know they won’t make as much money on interest.

You’re much more likely to overspend when you use zero percent financing to buy something. You’ll probably spring for the upgrades and extra features because, hey, you’re not paying interest, right?

You’ll be making a lot of car payments over a long period of time. Do you really want to do that to yourself and your budget? The average car payment for a new car is $648 a month with an average term of almost 70 months.1 The average car payment for a used car is $503 a month with an average term of almost 68 months.2 You guys, that’s a lot of payments. Not to mention an insane amount of money going out of your bank account every single month.

But when it comes to zero percent financing, the loan terms are a lot shorter, driving the monthly car payments higher. So if you can’t make that car payment, you’ll be up the creek without a paddle. One missed payment will end your zero percent financing agreement, and a hefty interest rate will set in before you can snap your fingers. Yikes!

For example, let’s say you qualify for a 45-month zero percent financing loan on a $27,000 used car. At first, you’re able to make your $648 payments just fine. But then something happens—you lose your job, there’s a health crisis in the family, or, I don’t know, there’s a global pandemic—and you can’t make the payment a few times over the course of the loan. Since you missed your payments, you can say goodbye to that zero percent financing promotion. Now the real annual percent rate kicks in—and it’s going to hurt. Average current used car loan rates for buyers are landing at 8.62%.3 Ouch! That would bring your monthly payment to $703.32 per month for the rest of the loan, not including any late fees they may have tacked on. You guys, when you’re already missing payments, adding $100 per month on top of that is definitely not going to help. Depending on the loan agreement, you might also have to pay interest on the full loan amount—even after what you’ve already paid. Why take the risk?

You might be thinking you can outsmart the system. You might think you’ll be the one who beats these guys at their own game. But they created the game, and they make the rules! They know that, and more often than not, people don’t pay the money back in time and end up getting slammed with all that interest.

Whether it’s 45 months or 70 months, a lot of life can happen, and it’s just not worth taking on that kind of debt for a vehicle that’s rapidly going down in value.

Here’s the catch: In order to qualify for zero percent financing, you’ll need a very high credit score. The exact range will vary depending on who you’re shopping with, but they’re not handing out this type of loan to someone who doesn’t already have a proven track record with debt. (A credit score is just an “I love debt” score that measures how you’ve interacted with debt in the past.)

By the way, if your credit score is higher than the number in your bank account, that’s a problem. Don’t live your life worshipping at the altar of the almighty FICO—you can live without a credit score! I don’t care what our society says, it’s absolutely possible to save up, pay with your own money, and avoid the stress of debt altogether. Trust me, you’ll be happy you did.

Nope. No matter what you’re financing, the best way to purchase anything is with cash! That’s right. There’s absolutely nothing better than buying something outright with money you have—especially if it’s in the budget. You don’t have to worry about how you’re going to pay for it later . . . because it’s already paid for!

Zero percent financing might sound like a great deal up front. But the truth is, it’s still debt! You’re still making payments on something (even if you don’t have to pay interest at first). All zero percent financing means is that you’re signing up for a payment on something you can’t afford. If you could afford it, you wouldn’t need a loan. Trust me, paying for things with cash makes life simple and stress-free.

Let’s go back to that average $648 new-car payment. If you took that payment each month and saved it instead, you’d have $15,552 in cash to spend on a reliable used car in two years. But why wait that long? Pick up a side hustle, cut back on eating out, and kick it up a notch! If you bumped that savings up to $900 a month, you could get a $16,200 car in just 18 months!

I know that saving up and paying cash for something (especially a car) is the opposite of what most people do. But most people are broke! And once the car is yours—like actually yours, fully paid for—just imagine the good things you can do with that money instead of throwing it away on a car payment. You can do things you actually want to do, like fund your retirement, give more to causes you care about, or even go on a family vacation.

Paying for large purchases without debt might sound crazy, but I’ve seen millions of families at all levels of income do it. So, go for it! If anyone tells you how wrong and crazy you are, just tell them you have zero percent interest in their opinion.

But like anything that sounds too good to be true, these offers almost always come with strings attached. We’ll explain the potential drawbacks to a 0% APR car loan, and how to decide whether it’s a deal worth taking.

When you take out a car loan, the lender will usually charge you interest in exchange for financing the purchase. The interest rate will vary depending on the term, type of car, loan amount and your credit score. Most lenders also charge fees on top of interest. The APR reflects both the fees and interest assessed on the loan.

A 0% APR deal typically means the lender is not charging interest or fees on the loan.That means all your monthly payments will go toward the loan principal.

The 0% APR loan deals are mostly available for new cars or in rare cases, certified pre-owned cars.

Unfortunately, most lenders do not offer 0% APR. In fact, these discounts are usually found through a car manufacturer, and will be limited to select vehicles.

Dealerships offer 0% APR because they’re making more money off the car purchase. And borrowers may be willing to buy a more expensive vehicle if they can get 0% APR financing.

Borrowers need an excellent credit score to qualify for a 0% APR deal, usually 740 or higher. You can check your credit score for free by visiting the sites of the three major credit bureaus or through your bank or credit card provider. If your score is below 700, you may find it difficult to be approved for a 0% deal.

Dealers also often require a down payment for a 0% APR loan, which can be several thousand dollars or more. If you don’t have the down payment in cash, you won’t be approved for the loan.

In rare cases, you may be able to find a 0% APR deal with no down payment required. Again, these deals will likely require an excellent credit score and stable income.

If you’re already in the market for a new car, the main pro to getting a 0% APR deal is that it could save you hundreds on interest in the long run. For example, let’s say you want to buy a 2021 Honda HR-V with a retail price of $21,220. If you get a 0% APR loan for 48 months, your monthly payment would be $442.

If you got a loan with 2% interest for 48 months, you would pay $460 a month and $878 in total interest over the life of the loan.

Even though paying no interest sounds like a can’t-miss opportunity, there are some downsides:

Because 0% APR deals are only available on new or gently used cars, the purchase price is higher than it is for used cars. You may wind up paying more on a monthly basis than you anticipated, which could affect your ability to reach other financial goals.

The car selection also tends to be limited. Even if a dealership is advertising 0% APR on one type of model, they may not offer the same special for other models. For example, they may offer 0% APR on a hybrid version of the model, but not on the regular version.

A 0% APR deal is often only available for specific loan terms, usually 48 months or less. Car loan terms range from 24 to 84 months, but 0% APR deals typically have shorter terms.

Since the most popular loan term is currently 72 months, the monthly payment for a 0% APR deal may still be unaffordable for many borrowers.

For example, let’s say you’re buying a $25,000 car with 0% APR for 48 months. Your monthly payment is $521. If you choose a 60-month term with 3% interest, your payment would drop to $449.

Even though a dealer may waive interest fees, they might require a down payment to secure the special rate. The down payment requirement for a 0% APR car loan is usually between 10% and 15%. For example, a $25,000 car would have a minimum down payment between $2,500 and $3,750.

Many dealers offer rebates to borrowers, which are like a credit you receive once the deal is finalized. Depending on the car and manufacturer, you can find a rebate worth several thousand dollars—but these rebates usually aren’t available if you get a 0% APR loan.

In some cases, you’re better off paying interest if you can get a rebate, if that rebate equates to a better deal. Also, if you choose the rebate, you can look for a lender outside of the dealership. This means you can shop around with multiple lenders to find the best rate, while still taking advantage of the rebate.

Every manufacturer determines their own sales and discounts. The best way to find a 0% APR car loan is to search around your local dealerships regularly, and online. Sign up for emails to be notified when an offer comes through. You can ask the salesperson to call you when 0% offers are available.

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

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 a more standard APR.

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

Lenders that offer 0 percent financing are known as captive finance companies and are linked to the auto manufacturers themselves. 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 would normally bring down your purchase price.

Zero percent financing deals are generally reserved for borrowers with excellent credit — typically classified as a credit score of 800 and above. 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 could vary from vehicle to vehicle.

Because zero APR qualification standards vary so widely, your best bet is to call the auto dealership in advance. Ask what criteria you need to meet to qualify for interest-free financing on a specific vehicle. Aside from your credit score, an auto lender may consider additional factors when it reviews your application, such as:

Regardless of the condition of your credit — good, bad, fair or excellent — you should take the time to seek preapproval from outside financing sources as well. Preapproval can help you compare your options and give you a backup plan if you don’t qualify for the automaker’s exclusive offer.

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.

Automakers want you to purchase your next vehicle from their company, not a competitor. This is a key reason 0 percent financing offers exist in the first place. In the interest of attracting new customers, auto manufacturers often offer bonus cash rebates to buyers.

Sadly, an auto manufacturer might not let you take advantage of both 0 percent financing and bonus cash. If you’re faced with this dilemma, you’ll have to decide which savings opportunity is the better deal.

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

Depending on your situation, refinancing your new auto loan in a few months might be an effective strategy. But there are some downsides to consider first. Namely, taking out two auto loans back-to-back — the original and the one you refinance it with — could harm 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 reduce the average age of accounts on your credit reports. In terms of credit scoring, the older the average age of your accounts, the better.

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

Low-interest car loans often come with 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 lasts for four years, but you would typically finance for five years, the cost difference can be meaningful.

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

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

You shouldn’t decide to increase your auto budget just to qualify for special financing. If you were planning to pay $10,000 cash for a pre-owned vehicle, taking on a new auto loan with a $30,000 price tag just to take advantage of no-interest financing probably isn’t a wise financial move.

Cash-back rebates often don’t apply to buyers who use the manufacturer’s special financing. If you crunch the numbers and cash rebates offer you a bigger savings opportunity, a 0 percent financing 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 with a $30,000 price tag, that incentive could bring your purchase price down to $25,250. If you financed $25,250 at a 4 percent interest rate for five years, you’d pay $2,651 in interest. In that scenario, your total cost would be $27,901 — as long as you didn’t add on extra products like extended warranties or incur any other financing fees.

Alternatively, you could pay the full $30,000 purchase price and opt for a 0 percent APR. Assuming no add-on products or fees, you’d still pay $2,099 more in this scenario than you’d pay by taking the cash rebate.

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.