Zero Percent Financing

When a dealership salesperson offers you zero percent financing, it means you pay no interest on your car loan. While there are advantages to this type of auto loan financing, there are a few pitfalls that can dissuade many buyers.

What Is Zero Percent Financing?

Generally, car loans come with interest rates; when you borrow money to purchase a vehicle, you pay interest over the course of your auto loan term. Basically, that interest is an incentive for the bank to loan you money.

Sometimes, however, financing offers come with zero percent financing—written as 0% APR (annual percentage rate)—meaning you pay no interest during your auto loan term; instead, you pay only the amount of your car loan.

Who Offers Zero Percent Financing?

Typically, you find this incentive from the automakers themselves, or sometimes the financial institutions associated with the automaker or dealership.

Car companies can offer 0% APR auto loans by pre-paying the car loan rates on certain vehicle models. Each company determines its own individual formula for pre-paying the auto loans based on vehicle cost and auto loan terms.

Pros & Cons of Zero Percent Financing

Pros

While it may seem obvious, the most substantial advantage to zero percent financing is that you aren't paying interest on your car loan.

As mentioned above, when you take out a car loan, generally you pay interest in addition to the monthly car payments. When you get 0% APR, all you pay is the monthly car payment. There is no interest, so essentially you're saving money.

When you pay back your zero percent financing auto loan you are basically only paying for the car itself.

Cons

Unfortunately, there are several cons -- or disadvantages -- to opting for zero percent financing, and they affect each buyer differently.

Price Negotiation

Typically, there's little-to-no room for price negotiation when you're offered 0% APR, and often the dealership charges the full manufacturer's suggested retail price (MSRP), which can increase your monthly payments.

For some car buyers, this balances out to not saving much money at all.

No Additional Incentives

Generally, you have a choice: You can take advantage of zero percent financing, or you can choose some other manufacturer or dealership incentive such as cash back or other rebates. You can't take advantage of both.

In this case, it's wise to determine which option is going to save you the most money in the long run.

Shorter Auto Loan Terms

Often the auto loan term (the duration of the auto loan) is shorter because you're paying only the purchase price and no interest. While this might sound attractive (it takes less time to pay off your loan!), shorter auto loan terms usually mean your monthly payments are higher.

Before signing the dotted line, make sure your budget can reasonably afford the set monthly payments.

Higher Purchase Price

As mentioned above, for zero percent financing dealers often charge close to, or the full, manufacturer's suggested retail price (MSRP), which increases your monthly payments because the car is more expensive than it would be if you were able to negotiate the price or take advantage of any manufacturer or dealer incentives.

Model Restrictions

Dealers can't offer 0% APR on just any vehicle on the lot; they have to adhere to the automakers' decisions. Thus, your selections are limited.

Also, sometimes these limitations are restricted to luxury model vehicles, which disqualifies many average car buyers.

High Credit Scores

Notoriously, zero percent financing isn't an option for people with bad or even average credit; usually, you must have a specific minimum credit score to qualify for 0% APR.

Save yourself some time (and heartache) and be sure to ask the salesperson upfront about any credit score requirements.

(For more information about credit scores, visit our section on credit reports.)

Late Payment Voids

In the end, if you qualify for zero percent financing (and it fits your budget), be sure to read the fine print. For example, often there are clauses that void the deal if you make late payments.

Who Should Get Zero Percent Financing?

If you qualify for a 0% APR offer, you should consider taking it. However, before you sign an agreement consider the following:

Are you happy with the price you are paying for the car?

Can you comfortably make the monthly payments?

Remember, you don't have to agree to the loan if you are not completely happy with it.