When some new cars aren’t achieving their expected sales pace, or they're reaching the end of their product cycle, most automakers will start offering incentives to increase the sales tempo. One of the best deals you can get is a zero percent financing offer. Scoring a zero percent deal can save you thousands of dollars in interest payments over the life of your auto loan.
You can’t get just any car with a zero percent offer, though there are plenty you can buy with a no-interest financing deal. While most vehicles with zero percent interest rate deals aren’t living up to their sales potential, it doesn’t mean they’re not good cars, trucks, or SUVs. They can be due for replacement, in a highly competitive segment, or just behind their sales goals.
In this guide, we’ll look at what makes zero percent financing deals so great, how to get a zero percent deal, and how to avoid problems once you have one.
- 0% Financing Means You Pay No Interest
- It Can Reduce Your Monthly Payments
- It Can Allow You to Afford a More Expensive Car
- It Can Allow You to Get a Shorter Loan
- You Can Invest Your Cash Instead
- Finding a 0% Deal is Easy
- You Need to Compare 0% Financing Offers to Other Car Deals
- You Still Want to Negotiate, Even When You’re Getting a 0% Deal
- You Need a Great Credit Score to Get a 0% Financing Deal
- You Need to Make Your Payments On Time to Avoid Costly Penalties
What does it mean to get a zero percent financing deal? It simply means you’ll pay no interest on your auto loan. A zero percent deal can save you thousands of dollars in interest payments over the life of your car loan, which lowers the total cost of buying the vehicle.
Even if the interest rate on the loan you get is only a few percent, when you finance at zero percent, you'll save a good deal of money. Here's an example using the popular Ford F-150 pickup truck. We'll say you've chosen a midrange 2020 Ford F-150 Lariat that carries a price tag of $42,500. With a five-year zero percent loan, you simply divide the price by the number of months in the loan term. Dividing $42,500 by 60 shows you would have a monthly payment of $708.
Without the zero percent offer, a buyer would have to pay interest on the truck loan. The average market rate for a five-year auto loan is currently around 4.6%. Plug the price, interest rate, and loan term into an auto loan calculator, and you’ll find that the monthly payment for the pickup is $794. Over the course of the loan, you would pay $5,156 in interest.
As we saw in the previous example, getting a zero percent auto financing deal from a car dealership would lower the monthly payment for a well-qualified buyer from $794 to $708 per month. That $86 per month difference can be the difference between a vehicle that fits into your budget and one that doesn’t.
In general, the less expensive the car you buy and finance, the smaller the savings will be. The more you finance, the more potential savings a buyer will have.
It’s important to remember that you should never buy a car based solely on the monthly payment. Instead, you want to look at the total cost of the vehicle, including the cost of financing. Dealers, on the other hand, will want to keep your focus on the payment, as it’s an easy way to get you to overpay for a car without realizing it.
Another way a zero percent deal can help you is by letting you fit a nicer car into your car-buying budget, with the same payment you would have had without the offer. We’ll use our pickup purchase from the previous section to demonstrate how much more expensive of a car you can buy if you’re able to finance it at zero percent.
Since you’re paying no interest, you simply multiply the payment by the number of months in the loan term to see how much vehicle you can afford. In this case, $794 multiplied by 60 months is $47,640. With the extra $5,000 in your budget, you can upgrade your truck with a V8 engine, four-wheel drive, or one of many option packages.
In general, you want to have the shortest car loan you can afford. Having a zero-interest loan helps you do that, though maybe not in the way you think it will. Since you’re paying no interest, there’s no real benefit to having the car loan written for any shorter than you qualify for. In this case, you simply make extra payments or pay a little extra each month to reduce the length of the loan.
For example, if your credit qualifies you for a five-year, zero-percent loan on a $25,000 car, your monthly payments would be $417 per month. Take out that loan, but instead pay about $100 more per month ($521), and you can have the car paid off in four years, rather than five. While you can certainly do that if you’re paying interest (and there’s no pre-payment penalty), it’s easier to do with no interest financing.
Buyers planning to pay cash on a car that has an available zero percent financing deal may want to consider taking out the car loan, then putting the money in savings. That way, the cash can earn a little interest while you're slowly paying off the car loan. It won’t be a lot, and it will be taxed, which reduces the amount you make a bit.
For this to work, there are some caveats to consider. First, if there are application or loan fees, their cost may eclipse any interest you earn from your savings. You'll want to sequester the money away from the rest of your bank accounts and set up an automatic monthly payment for your loan. You don’t want to be late on even a single payment, or you might lose your zero percent interest rate.
While you can earn some interest using this method, in most cases, it's a whole lot easier just to pay cash for the car and avoid the hassle of having a loan.
Of course, financing deals with zero percent interest rates aren’t available on every car. So where do you find them? Our zero percent car deals page is a great place to start. Each month, we highlight no-interest deals. Our best car deals pages feature hundreds more deals that are updated every month, and many are available with zero percent financing. You can also see the latest special financing offers on the websites of the various auto manufacturers.
Zero percent offers are provided by the financing arms of automakers and are only available at their franchised new car dealers. They’re advertised alongside low-interest auto loan financing deals that save you money, but not as much as zero percent deals. You won’t find zero percent financing offers at banks or credit unions, as they’re subsidized by the carmaker trying to sell you the vehicle.
Sometimes you’ll see an automaker offer a choice of cash back or zero percent new car financing. Before you head to the dealership, you’ll want to compare the two side-by-side to determine which saves you the most money.
Here’s how you compare two competing car deals: For this example, we’ll say that you’ve found the new vehicle of your dreams, and you have negotiated a price of $30,000 with the dealership. It’s being advertised with either an interest-free financing deal for five years or $3,000 cash back. Which is the better car deal?
Opt for the zero-percent financing offer, and the cost of the vehicle is $30,000 since you won't be paying any interest. Assuming you don't make a down payment or have a trade-in, you’ll have 60 equal monthly payments of $500.
Take the cash back deal (which may be called bonus cash or a cash rebate), and you'll drop the price of the car to $27,000. However, since you can’t get both the rebate and special financing on the same deal, you'll have to pay interest for five years. Currently, the average rate on a five-year loan is about 4.6%. The math to figure out interest is complicated, so we'll use a car loan calculator to work out the numbers. Simply enter the length of the loan, the interest rate, and the vehicle's price, and it will figure out the monthly payment. In this case, the monthly payment is $505.
In our example, the cash back deal will cost you $5 more per month, or $300 over the course of the loan. Because of all of the variables involved, you need to run the numbers on any offer you are considering. You must do the calculations yourself, and not leave it up to the car dealer to do it for you. They’ll likely want to keep you focused on the monthly payment, and it’s easy to lose track of the total cost of the car.
Here's something the dealer probably won't tell you: Even if you are getting a zero percent offer from the automaker, you can still negotiate the price of the car. You definitely should do so. You may have to invest some time haggling back and forth, but the money you save can make the time investment worth it in the long run.
Before you ever go to the dealer, you should have an idea of how much you should pay for the vehicle. The buying insights at the bottom of many of our new car reviews can give you a picture of the demand for the car, truck, SUV, or minivan you’re considering.
Our article on negotiating the price of a new car offers tips to ensure you’re getting the best deal possible. Watch out for budget-busting add-ons that can wash away the savings you’re getting from a zero percent car loan.
There’s one significant limitation to offers with a zero percent interest rate: Not everyone qualifies to get the best deals. To get an auto loan with a zero percent rate, you'll need to have an excellent credit score. That rule applies to any financing deal with a low rate, not just zero percent offers.
Your credit score is a three-digit number between 300 and 850 that represents the information in your credit report. Lenders use your credit rating as a predictor that you will make all of your payments and pay off the entire loan balance. The higher the score, the more creditworthy you are. The lower the score, the less likely you will be to qualify for a zero percent financing offer.
What credit score is good enough? That's impossible to say, as each automaker sets their own threshold of what it means to qualify. For some, it might be 720, while others require a stellar 775 credit score.
It helps to know your credit score before you start shopping for a vehicle. When you have an idea of what kinds of financing and other offers you’re well-qualified to receive, it’s easier to set a budget. Many credit card companies will provide your credit score as a benefit of having their card. You can also get your score at websites such as CreditKarma.com. Beware of sites that require you to sign up for expensive credit monitoring services to get your score. There are plenty of options where you can get your score for free.
Since car buyers with imperfect credit scores may not qualify for the best financing at car dealerships, it’s critical to get pre-approved for a car loan at a lender that is independent of the dealership, such as a bank, credit union, or finance company. When you have an auto loan offer in your pocket, you’ll give the dealership a benchmark they need to beat if they want to get your financing business.
Before signing any loan documents, it's a good idea to read them thoroughly. This way, you’ll fully understand the terms of the loan. Some zero percent loans have terms stating they can move to a default interest rate if you make a single late payment. That rate can be significantly higher than typical market interest rates.
The best way to avoid the possibility of a late payment is to set up automatic payments from your bank or credit union to your lender. Make sure they’re set a few days before each payment is due, so weekends, holidays, or other scheduling glitches don’t result in a late payment.