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Credit Karma Guide to 0% APR on Auto Loans


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It’s possible to pay 0% interest on an auto loan, but that doesn’t mean it’s easy or the best option. In this guide, we’ll go over the pros and cons of 0% financing and show you how to run the numbers to get the best deal.


Watch enough car commercials, and you’re bound to come across an automaker advertising 0% interest on auto loans. Paying absolutely no interest on an auto loan sounds almost too good to be true. But is it?

Believe it or not, it’s possible to pay 0% interest on an auto loan. Which isn’t to say it’s likely.

Automakers tend to highlight 0% interest in their advertising because it’s an eye-catching number, but not everyone can qualify for a loan with 0% APR. Those who do typically have excellent credit scores, and the purchase may have to meet other criteria to qualify for the offer.

In this guide, we’ll go over everything you need to know about 0% APR on auto loans. First, we’ll review the basics and debunk the notion that 0% APR is inherently a “scam.” Then we’ll go over how to find and qualify for 0% interest on an auto loan. Finally, we’ll review some alternatives in case you can’t qualify or decide a 0% interest loan isn’t right for you.


How is 0% APR on auto loans possible?

It’s a fair question. What incentive would a bank have to lend you money if it didn’t receive interest on the loan?

A 0% APR loan is possible because banks aren’t usually the ones doing the financing. These loans are typically financed by the automaker. Since the automaker still makes money on the car itself, it doesn’t necessarily need to charge interest in order to come out ahead.

For an automaker, 0% financing can be appealing for a couple of reasons.

  • Boosting sales. A vehicle-specific 0% APR offer can help clear out old inventory of a particular vehicle, leaving more room on the showroom floor for next year’s model.
  • Getting people in the door. Everyone who visits a dealership is a potential customer, regardless of whether they actually qualify for 0% interest. From an automaker’s perspective, the more chances they have to make a sale, the better.

How to find 0% APR on auto loans

Finding an offer for a 0% APR auto loan usually isn’t difficult. Automakers tend not to be secretive about them, seeing as how they’re a great tactic to get people in the door. Still, you may need to do some digging to find the right deal for you.

If you already know what vehicle you’re looking to purchase, a quick Google search should show you whether the car you’re considering has a 0% APR financing offer or not.

If you’re not sure which car you want, things can be a bit trickier. You can look for an aggregated list of 0% APR auto loan offers available (such as this one from U.S. News), but they’re not always current or comprehensive. Before taking these lists at their word, make sure you verify the offer on the automaker’s website before moving forward.

Another option is searching automakers’ websites directly. This works best if you already have a short list of automakers you’re interested in buying from. Many automakers have an incentives page that lists all the offers currently available; you can usually browse these pages to find 0% financing offers.

Keep in mind that 0% financing is generally more common with new vehicles than used vehicles. Buying a used vehicle without 0% financing may save you more money in the long run; more on that later.

How to qualify for a 0% APR auto loan

Qualifying for 0% APR on an auto loan isn’t rocket science. But it isn’t necessarily easy, either.

“You’ll usually need a stellar credit score and a long credit history, along with a clean credit report, in order to qualify for one of these loans,” says David Bakke, personal finance expert at the personal finance website Money Crashers.

“Stellar” is somewhat of a relative term when it comes to credit scores, and there’s no one magic number that will qualify you for 0% financing.

While different lenders have their own standards for rating credit scores, 700 and higher (on a scale of 300 to 850) is generally considered good. But even that might not qualify you for 0% financing. Some reports suggest that you’ll need scores as high as 720 or 750 to even be considered for 0% financing.

Automakers aren’t typically transparent about the minimum credit scores required for 0% financing. After all, they’re in the business of getting you in the showroom to look at cars. If you know you won’t qualify, you may not head to the showroom at all.

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What to consider before taking out a 0% APR auto loan

Surprisingly, taking out a 0% APR auto loan may not be the best move for your finances.

The interest rate on your auto loan is only one of many factors to consider when buying a car. Others may include your monthly payments and whether buying a new car is the right move for you in the first place.

Let’s go through some of the factors you may want to consider before agreeing to 0% financing.

Alternative incentives

Occasionally, automakers and dealers will offer multiple incentives on the same car model. In some of these cases, agreeing to 0% financing means forgoing other, potentially more lucrative, incentives, such as a manufacturer’s rebate.

If you’re offered either a 0% APR auto loan or a $1,000 rebate, you have a decision to make. The answer isn’t always clear-cut. You’ll have to run the numbers to see which incentive will be the most advantageous over the lifetime of your auto loan.

The easiest way to see which incentive is better for you is to run the numbers. Here’s a quick (and somewhat simplified) example that shows you how to do that.

The situation: The new car you’re about to purchase has two incentive options you can choose from, but you’re not allowed to take both.

Incentive #1: A 0% APR auto loan for 60 months

Incentive #2: A $1,000 rebate

The car you’re about to purchase costs $35,000. You plan to put down a $5,000 down payment and finance the rest. If you had to get a car loan elsewhere, you’d have to pay 2.9% APR on an equivalent 60-month loan.

Let’s run the numbers (note that all figures are estimates and don’t include taxes and other fees).

0% APR (60-month loan) $1,000 rebate & 2.9% APR (60-month loan)
Car purchase price $35,000 $35,000
Less: Down payment $5,000 $5,000
Less: Rebate $0 $1,000
Amount to be financed $30,000 $29,000
Plus: Interest paid $0 $2,188
Total cost $35,000 $36,188

 

In this example, the 0% APR 60-month auto loan would save you approximately $1,188 in total, more than the $1,000 rebate.

Bump the rebate up to $3,000, however, and the rebate would save you approximately $962. That’s why it’s important to always run the numbers.

When trying to figure out your best course of action, make sure to include all relevant factors, including changes in sales tax based on rebates and any other factors that may change depending on the incentive you choose.

Term of the loan

Just because a 0% APR auto loan is available doesn’t mean it matches your needs.

“A 0% loan can oftentimes mean higher monthly payments,” says Korey Adekoya, business development manager at Shabana Motors in Houston.

Sometimes, 0% APR special financing offers only allow a 36-month repayment period. This can eventually lead to much larger monthly payments, which may not fit within your budget.

That said, 0% APR offers can alternatively stretch as long as 72 months. You won’t be hurting from interest payments, but you could end up owing more than your car is worth if your new car depreciates faster than you pay the loan off. This is often referred to as being upside down on your car loan.

Whether you need lower monthly payments or want to make sure you don’t go upside down on your car loan, taking out a new car loan with a relatively low interest rate may work better for your situation than a 0% APR offer.

Is buying a new car the best option?

Despite the allure of paying no interest on your car loan, buying a new car may not be the best option for you.

A new car typically depreciates thousands of dollars as soon as you drive it off the lot. When you buy a used car, someone else is taking the biggest depreciation hit for you. Yes, a used car will already have miles on it and may not last as long as a new car would, but you’re likely paying a much lower price to get the remaining useful life of the car.

You may argue that used-car loans typically have higher interest rates, so a used car may not be the better deal. Even so, the interest you pay could be significantly outweighed by the savings you get from avoiding the immediate depreciation of a new car.

Should I buy a new or used car?

What to watch out for with 0% APR auto loans

You’d think a 0% APR auto loan means you’re getting the best deal possible, but that isn’t always the case. Here’s what you should watch out for.

Negotiate everything else first

“The key here is to negotiate the price of the auto down to the best of your ability and then to score the 0% loan,” says Bakke.

Negotiate the price of the car first, and then negotiate how you’ll pay for the vehicle. If you don’t, you may not realize you’re agreeing to pay a higher price for the car as a trade-off for the 0% APR auto loan.

If you negotiate the price first without ever mentioning how you’ll pay, you’ll know the price you pay has nothing to do with the potential of a 0% APR auto loan.

Verify the conditions of the 0% APR offer

Some less-reputable dealerships aren’t always forthcoming about the best financing rates you qualify for. After you apply for a 0% APR loan, they may come back and say you only qualify for financing at a higher rate. If the dealer can get you to sign a loan at a higher rate, it stands to make more money.

Make sure you ask the dealer specifically what is needed to qualify for the 0% APR auto loan offer. If the dealer refuses to tell you or show you your credit score upon request, something fishy may be happening and you could be better off getting a loan from a bank or credit union instead.

Alternatives to 0% APR auto loans

Before you sign on the dotted line for that 0% APR auto loan, consider the following options that may be a better fit for you.

Paying cash

Paying cash for a car requires discipline, but in some cases it’s the right move. If you’d rather not deal with the hassle of a car loan, here’s how you may go about it.

  • Once you pay off your current car loan, don’t trade your car in for a newer model. Instead, take the money you’d put toward loan payments and put it in a savings account to pay for your next car.
  • The longer you wait until you upgrade your car, the more cash you’ll have to pay for your next car. If you wait long enough, you can pay for your next car completely with cash (or at least put down a sizeable down payment).
  • Even if you can’t pay for your next car completely with cash, you can start saving again when you’re done paying off your next car loan. Thanks to the large amount of cash you were able to put down on the new car, you should be able to pay the loan off faster and have more time to save until you buy your next car.

Taking out a loan through a bank or credit union

Sometimes declining financing from an automaker will work out better for you in the long term.

“Always look into your options for loan rates,” says Adekoya. “You don’t have to go with what the dealer offers.”

Auto loans that require interest payments may offer better options with regards to the term of the loan. Additionally, if other incentives end up being the better offer, paying a higher interest rate may not always be a bad thing.


What’s next?

Now that you have a better understanding of 0% APR auto loans and what to look out for, you can continue on your car-buying journey.

You can start by checking your credit scores to see if you’ll likely qualify for a 0% APR auto loan. You may also want to get auto insurance quotes for any vehicles you’re seriously considering, as this can help calculate the total cost of car ownership.

Finally, make sure to get quotes for other auto loan options just in case you don’t qualify for the 0% APR auto loan incentive. This way, you’ll be able to compare the dealer’s best financing offer to other offers to make sure you’re getting the best deal.

Interested in learning more about auto loans? Check out the following articles: