Since the vehicle market has had significant ups and downs over the years, auto dealers have taken a substantial hit in the realm of new car sales. In an effort to incentivize buyers in otherwise stagnant markets, the finance arms in partnership with key dealerships created the 0% auto financing deal.
For some car buyers, a 0% interest rate is enough to get them into a salesman’s office at the dealership, but for others, the financing offer seems too good to be true. But the truth is it is real, with a handful of limitations.
Before diving into your next automobile purchase, consider the advantages and disadvantages of this elusive interest-free financing offer.
What is Zero Percent Auto Financing?
In the simplest terms, a 0% interest rate car loan is one in which you do not pay interest on money borrowed from the auto finance company or dealership.
Instead of making a profit on new vehicle loans with interest rates ranging from roughly 2% for highly qualified borrowers to more than 10% for those with a less-than-perfect credit history report and score, finance companies provide buyers an opportunity to pay the same amount as a cash buyer. The difference is that payments are broken up and repaid on a monthly basis.
The majority of 0% car loans are funded directly from the dealership, not the underlying finance arm of a major auto brand. For a dealership, the amount of money earned on the sale of a car, truck, or SUV, is the same under a 0% annual percentage rate (APR) auto loan as it is with a cash deal, but the earnings are simply spread out over time.
Advantages to 0% Auto Financing
The most obvious benefit to accepting a 0% car loan offer is the ability to repay the purchase price of the vehicle over time without the additional cost of interest.
Let’s look at an example.
If you were purchasing a $30,000 vehicle new, off the lot, and were approved for a five-year, or 60-month loan with a 5% interest rate, your monthly car payments would equal roughly $566. With that loan offer, your total interest payments over the course of the loan would equal $3,968 in addition to the purchase price, barring no extra principal payments being made early.
Conversely, the same $30,000 loan, free of interest, would require a $500 monthly payment, and of course, no interest expenses. The cost savings on a 0% interest car loan can be in the thousands for the right buyer.
It should be noted that the simple example above excludes a down-payment, vehicle trade-in, sales tax, title, registration, and other fees, which could change the cost differences even more significantly.
Drawbacks to Zero Percent Auto Financing
While zero percent loan offers are a smart way to finance a vehicle purchase, they are not suitable nor are they available to every buyer. Here are the most notable downsides for you to review.
a. You’ll Need Great Credit
First, if you have less than exemplary credit scores, a no-interest loan is likely not an option without help from family or friends. Because dealerships and their lenders are not making an additional profit on a 0% APR auto loan, they want to protect their default risk by only providing this offer to highly qualified borrowers.
b. Limited Loan Term-Lengths
Additionally, 0% auto loans may only be available in reduced repayment terms, meaning instead of a 60, 72, or 84-month loan, you may only have the option of a 24, 36, or 48-month term. A short duration of repayment results in a much higher monthly payment obligation, which may not be appropriate for borrowers with a tight budget.
c. Vehicle Model Restrictions
Finally, zero percent automobile loans are often restricted to certain new models with no customization, creating the ability to negotiate on the purchase price and features an uphill battle.
Final Thoughts on 0% APR Auto Loans
As a car buyer, it is important to understand how 0% interest rate auto loans are both beneficial and restrictive. If you cannot qualify based on credit history, do not have the monthly budget to afford high payments, or want additional options on your new vehicle, chances are a 0% auto loan is not in your future.
However, in the current low-interest-rate lending market, financing a vehicle purchase does not have to be an expensive endeavor. To find the best auto loan rates for your situation it’s beneficial to compare local bank deals and credit union offers with what a dealership, brokerage, or online lender provides.
You’ll often experience a degree of savings by doing your research, evaluating the pros and cons, and obtaining financing before heading to the dealership.
