Many manufacturers and dealerships advertise no-interest car loans. These loans, offered through captive finance companies owned by the manufacturer, aim to attract prospective buyers.

As car loan interest rates have soared over the past few years, no-interest car loans have become increasingly appealing. According to a recent Experian study, the average auto loan APR for borrowers with excellent credit scores is 5.38 percent for new cars.

However, qualifying for a 0 percent APR loan is difficult without excellent credit. It tends to be worth it only if it results in significant savings on your monthly payment.

What is 0% APR?

A 0 percent APR or interest-free auto deal means you borrow money without paying any interest. Your monthly payments go directly toward reimbursing the lender for the amount it paid the auto dealer, with no extra money from your pocket going into the lender’s bank account.

This contrasts with the typical approach, where the lender charges interest as a fee for providing financing. Interest and fees are the primary ways lenders make money.

Here’s an example to illustrate the difference in monthly costs between a 0 percent APR and the average APR for a new car.

How does 0% APR work?

Financing a car interest-free may sound too good to be true, but it’s a strategy auto manufacturers use to sell more vehicles.

Lenders offering 0 percent financing are known as captive finance companies, linked directly to auto manufacturers. Examples include Ford Motor Credit, GM Financial, Nissan Finance, and Toyota Financial Services. For instance, if Ford needs to sell more F-150s due to overstock, it might offer zero APR loans to select borrowers through its own financing arm.

While no-interest financing appears more affordable initially, it’s not always the case.

When auto manufacturers offer 0 percent financing, they might compensate for the “lost” income in other ways. For example, a dealership might push hard to sell you add-on products, such as extended warranties or gap insurance. Additionally, you may have to forgo benefits like rebates that typically lower your purchase price.

When to get 0% APR financing

No-interest financing can be a smart choice if you’re looking to finance a new vehicle. However, manufacturers usually don’t offer this deal on base models, so you’ll likely pay for additional features.

Before heading to the dealership, secure a preapproved financing offer from a lender. This will help you calculate potential savings on interest with 0 percent financing.

If you can afford the payments and know you’ll save a significant amount on the car you want, no-interest financing is a great option. Otherwise, weigh it carefully against other financing choices.

If you’re struggling to decide between a rebate and a 0 percent APR deal, use Bankrate’s rebate vs. low-interest car payment calculator for guidance.

Limits of 0% APR financing

Interest-free financing can be an attractive option for some borrowers, but there are a few potential drawbacks to consider:

Limited Selection: Interest-free financing is often available only for specific types of vehicles. Typically, the car must be new, and manufacturers may offer these deals for models with excess inventory that they need to move.

Limited Repayment Options: With 0 percent financing, your repayment options might be more restricted. You may have a shorter period to repay the loan compared to other financing offers. While repaying a loan quickly can be beneficial, ensure you can comfortably manage the higher monthly payments without overextending your budget.

Steps to get a 0% APR car loan

If you’re thinking about applying for a no-interest car loan, here’s how to proceed and tips to improve your chances of approval.

1. Make sure your credit is excellent

Lenders look for a nearly flawless payment history and strong debt management before offering no-interest financing. A top credit score—781 or above—will secure the best deals, though you can still get competitive rates with a score of 670 or higher.

A stable income is also crucial. Since these loans are typically available for shorter terms—up to 48 months—resulting in higher monthly payments, lenders need to be confident that you can easily manage these payments and have a low risk of defaulting on the loan.

2. Save up for a down payment

You might need to make a larger down payment. Even if a down payment isn’t mandatory to qualify for financing, many lenders require a substantial down payment to qualify for a 0 percent interest auto loan.

Lenders also look for a low debt-to-income (DTI) ratio. A low DTI indicates that your income will cover this new debt in addition to any other existing obligations you have.

3. Research available 0% APR car deals from manufacturers

Unfortunately, traditional banks, credit unions, and online lenders typically do not offer no-interest auto loans. Instead, you’ll need to research auto manufacturers that provide these deals through their captive finance companies.

If you have specific manufacturers in mind, visit their websites to check their current financing offers. It’s a good idea to compare deals from at least three different manufacturers. You can also search for offers by model or contact dealers directly for more information before you start shopping for a vehicle.

4. Negotiate and apply for the loan

Zero percent financing is just one aspect of the car-buying process. You should still negotiate the car’s price as you would with any other purchase.

Try to keep your interest in no-interest financing confidential until after you’ve settled on the price. Dealers often aim to maximize their profits, so revealing your intent to use a 0 percent auto loan early on might undermine your negotiating position.

Dealerships may also try to upsell you on additional features, gap insurance, or extended warranties. These extras are optional, so stand firm if you’re not interested.

Once you’ve finalized the vehicle’s purchase price with the dealer, you can proceed with applying for financing.

Do’s and don’ts of 0% APR deals

If you determine that a 0 percent APR auto loan is the best option for you, these do’s and don’ts can guide you through the process.

Do:

  • Negotiate the purchase price before requesting the 0 percent APR offer.
  • Get preapproved for an auto loan before visiting the dealership.
  • Ensure you can afford the monthly payments.
  • Check if the manufacturer has a cash-back incentive program that you can combine with the special financing offer.

Don’t:

  • Accept a short-term loan with an unaffordable monthly payment.
  • Opt for a long-term loan just to lower your monthly payment if it will cost you more overall.
  • Choose 0 percent financing over a cash-back incentive without comparing potential overall savings.
  • Skip the down payment if you can afford one.

In Conclusion

To determine if a 0 percent APR car deal is beneficial for you, compare it to an auto loan from an external lender and calculate your actual monthly cost. In some cases, the deal may not offer significant savings. Special financing often demands excellent credit and may not always be the best option. Review current auto loan rates to ensure that the interest-free deal won’t end up costing you more in the long run.