If you’ve listened to the radio or turned on the TV — especially around a holiday — you’ve almost definitely heard dealer offers for 0% interest on a new car. However, if you’ve tried to take advantage of these offers, you may be miffed to discover you or your purchase don’t qualify. Here’s how to take advantage of these offers, and how to know whether you even should.
Where to find 0% interest loans
While it’s not entirely impossible to get a 0% annual percentage rate (APR) loan at a traditional financial institution, like a bank or credit union, it would be remarkably unusual. “It is very very unlikely that any person is going to achieve a zero percent loan unless they are purchasing a new car from a franchise dealer,” says Matt Jones, Senior Consumer Advice Editor for Edmunds.
Why? Dealerships are incentivized to sell lots of new vehicles, so their in-house lenders will sometimes offer financing that is particularly advantageous to the consumer — and less so to the lender. After all, what incentive would a bank have to loan money without earning interest on it? Franchise dealers also have larger stocks of the same make and model new car, so it’s easier for them to offer promotional financing around specific vehicles.
While franchise dealers are more likely to offer 0% APR, it is possible to pay 0% interest when financing at a used car dealership or outside of dealers’ advertised 0% interest financing events. In some cases, a dealer will offer to pay your interest for you in order to close a sale, says Jones. We’ll discuss below how you might make yourself a better candidate in such situations.
How to qualify for 0% APR auto loans
The largest factor that will affect the APR you’re offered at dealerships — and other financial institutions — is your FICO credit score. Your FICO score weighs factors such as your payment history, the total amount of money you owe, the age of your accounts and more. However, your FICO score is not the only factor that will determine the financing you’re offered. Here are a few others:
- Your auto loan history. In addition to your FICO score, you also have a FICO Auto Score. So, if you only have fair to good credit, but you’ve had many auto loans and never missed a payment, you may still qualify for 0% APR financing.
- Your down payment and/or the value of the vehicle you’re trading in. “The more you put down, the lower risk you are,” says Jones. In other words, “The more you put down, the better your chances of securing a better rate.”
- Brand and dealer loyalty. If your dealer doesn’t offer 0% APR financing, but you want to negotiate for them to pay your interest, it helps if you have a relationship with the dealership.
- The make and model of the vehicle you’re buying. “There are certain brands that seem to always offer zero percent financing, but that doesn’t necessarily mean you can buy the exact model you want,” says Jones. Low- and no-interest offers are often only valid on marquee cars — for example, the Toyota Camry or Ford F-150 — says Jones. Alternatively, a manufacturer may be trying to push specific inventory off the lot, like the old model year or specific models.
- How much you’re financing. Jones explains, “A lot of the time if a dealership decides to pay your interest for you, they will have strict stipulations on how much you can finance.” The dealer won’t want to pay a lot of interest for you to borrow a large amount. You can reduce the size of your loan both by spending less or paying more upfront.
No-interest “hacks”: Looking beyond traditional auto loans
There are a variety of financing “hacks” you may find recommended, though these only work in very specific cases. For example, if you’re buying an inexpensive vehicle or already have a fair amount of cash saved, you may be able to take advantage of 0% APR credit card or personal loan offers. You can either take out a new credit card with a 0% introductory rate, or take advantage of a personal loan offer from an existing credit card. This only makes sense, however, if you will be able to pay off the balance before the introductory rate ends.
You could also get a better interest rate by taking out a home equity loan instead of an auto loan; this should, however, be done very cautiously. You will pay closing costs, and, if you default on the loan, you could be putting your home in jeopardy.
What else to consider
Before beginning your quest to find a 0% APR auto loan, you should be aware that it might not always be the best choice. For example, if a large volume of a specific car is being sold at 0% interest, says Jones, this may decrease the value of the car and make it harder to resell if you only keep it one to two years.
Low- or no-interest offers may also require you to finance the car over a shorter period of time, increasing your monthly payments. Be sure to consider not only your overall budget, but your monthly payment budget, too.
Finally, if you do secure the elusive 0% APR, Jones recommends paying as little as possible and making the loan terms as long as possible. After all, if you’re not paying interest, why lock yourself into higher payments or paying more cash upfront? This can, however, make it easier to owe more on your car than it’s worth, since new cars depreciate rapidly. Plan to keep your car for several years, and be sure to get gap insurance with your auto insurance provider to cover the full cost of the car in case of a loss.