What is a 0% Car Loan?

Zero percent financing are one of the most common incentives offered by the automotive industry and many major manufacturers. Here is what you need to know.

What is a 0% Car Loan?

You know those radio ads you hear, proclaiming that you can get a great, 0% loan on a car and walk out with the keys, today? You know the ones… they’re usually accompanied by an announcer who likes to yell the deals at you as you sit in traffic.

Zero percent auto loans are becoming more and more common these days. In fact, as KBB.com points out, zero percent financing are one of the most common incentives offered by the automotive industry and many major manufacturers offer them. There’s some confusion around them so we here at Instamotor wanted to help you learn more about these often too-good-to-be-true kinds of loans.

What is a Zero Percent Car Loan

A zero percent loan essentially makes that interest rate zero which means you won’t (in theory) have to pay any more than you borrow from the bank. When you take out a car loan the bank will charge you an interest rate. The interest rate is usually expressed as a percentage. So if you are approved for 5% interest on $20,000 loan, paid over 60 months (or 5 years), the bank will charge you an additional $2,645.48 over the life of the loan to let you borrow its money.

So a zero percent car loan sounds great right?

What's the Catch with a Zero Percent Loan?

Lenders and automakers have to make money somewhere and they certainly are not going to give you anything for free. First, these kinds of loans are actually very hard to get. While most lenders won’t disclose what kind of credit rating you have to have to score a zero percent auto loan, the folks over at Autoblog spoke to one expert who says that it’s likely you need to have 680 to 700 credit score. That’s an almost perfect score, making it near impossible to achieve for most buyers. It’s estimated that fewer than 49% of Americans had a score above 680 in 2014 when the most recent numbers are available (via ValuePenguin.com). Of those with that kind of score, on average, just 10 of buyers actually qualify for these kinds of loans, according to a 2011 story from Bankrate. If you do qualify for these special loans, it’s highly likely that the dealer will be less willing to negotiate with you on the price of the car because they won’t be making any money on the car loan.

Shorter Terms & Higher Monthly Payments

Many zero percent car loans have much shorter terms than a conventional loan you can get from a bank, which means that the monthly price you pay could go higher. In addition to this, when you choose a zero percent product from the manufacturer, you may be exempting your deal from any rebates or discounts on the car you are looking to buy.

How Dealers Use 0% Loan as Bait

Remember that those enticing zero percent deals are often used as a marketing tool to get people into the showroom. Once they have you hooked on a model from last year with a 0% financing deal, dealers roll out the brand new model that doesn’t offer the same financing option. The other “trick” that dealers use is they will offer the 0% deal, but when you don’t qualify for it, they then put you into a more conventional loan product that could end up costing you more.

Summer and Holiday Season Deals

There are a few other things to know about zero percent deals, too. They generally follow a cyclical pattern according to a story over at Edmunds.com, you’ll see a lot of them in the summertime when dealers are trying to move inventory. You’ll also see a lot of them around the holidays when dealers are trying to sell one year’s models to make room for the newer stuff that’s about to hit their showroom floors.

In some cases dealerships will offer their own version of a zero percent financing deal, too. Some dealers will offer to pay the interest on the loan (essentially making it a zero percent loan to you), or they will request a big downpayment to make the financing work as a zero percent loan. In either case you should be wary of the deal. That’s not to say it’s not worth looking into or even doing. It just means that (as the old adage goes) it could be too good to be true. After all, dealers and manufacturers are in the business of making money and that money is going to come from your pocket.

How Dealers May Benefit from a Zero Percent Loan

Be aware that in some cases dealers are getting a benefit when they promote a zero percent deal—usually in the form of an incentive. That, according to Edmunds can mean a better deal for you. In some cases taking the dealer financing may be the best way to score a deal for yourself. The manufacturer usually pays the dealer a bonus back at the end of the deal, which means the dealer can be more flexible on the price. Edmunds says it doesn’t happen often but it’s worth being aware of and checking on when you are in the market for a new-to-you vehicle.

There are also times when a dealership gives a buyer a choice between a cash incentive and a zero percent loan. Typically the bonus cash would be the way to go, but in this case, the cash has to be enough to offset the amount of money you’re saving by using a zero percent loan. Edmunds uses the following example:

“Let's say you were buying a $25,000 car with a $1,000 down payment and you've qualified for a loan with an interest rate of 3.5 percent. You then have a choice: a bonus cash incentive or a zero-percent loan with no additional discount. It would take an incentive of about $2,500 to beat the zero-percent loan offer. Any amount of bonus cash less than $2,500 makes the zero-percent loan the better option.”

So, all-in-all, zero percent financing may sound like it’s nearly impossible to get and maybe not as worth it as it seems—but if you do your homework and know what you are getting into before you sign, you’ll be in great shape to make a good purchase and save money on your used car, too.

Use our Auto Loan Calculator to help you figure out how much your monthly car payment would be.

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The Instamotor TeamThe Instamotor Team

Not your typical used car salesman. Our team is here to provide honest and transparent advice about car buying and selling.

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