When buying a new or pre-owned vehicle, one big hurdle to clear is securing financing. In today's competitive car sales marketplace, automakers and dealerships will pull out all the stops to get you into the showroom, including offering 0% financing.
While 0% financing is a great offer on the surface, there are some specifics to consider before jumping on this car finance deal.
To help you decide if that 0% financing is right for you, we'll go through all the ins and outs of these offers, highlighting the benefits, drawbacks, and how you can save money even without interest-free financing.
How to Get a 0% Financing on a Vehicle
A 0% car loan is essentially like getting to pay off a vehicle over time with no penalty. In contrast, interest usually adds a few thousand dollars to any new car purchase throughout the loan. With 0% financing, there’s no interest added to the loan, so that $25,000 car will cost exactly that amount throughout a multi-year loan.
It seems like a great deal, but there’s one big caveat: getting approved. To get 0% financing on a vehicle, you generally need top-tier credit. This usually means having a credit score of at least 725, which puts you in the "very good credit" category. In some cases, you might even need to be in the "excellent credit" range, which starts at 760.
You can usually find out what the credit requirements are for a 0% financing offer by reading the fine print disclaimers on the advertisement.
Where to Find 0% Interest Rate on a Car Loan
There's one place to get 0% interest on a car loan: a new car dealership. These dealerships get special financing offers from the manufacturer's captive financing arm — a lender owned by the automaker, like Toyota Financial Services or Honda Canada Finance, Inc. — to help move inventory.
Here at Clutch, we’re also able to offer 0% financing for the purposes of Sharia compliance. We are able to do this with our lending partners such that they still pay for the vehicle and interest.
How Automakers Can Afford to Offer 0% Financing
Automakers can afford to offer 0% financing several ways. First, the automaker owns the financing arm, so the cost to finance the vehicle is minimal. Second, they can control the profit margins by offering this special financing only on certain new vehicles and stripping all other incentives.
For example, if the Honda CR-V Black Edition has the highest profit margin, Honda may offer 0% financing to help sell more of them. If there are any other incentives, like a $5,000 cash rebate, it can adjust the terms so customers can't combine the rebate and the 0% financing.
Stripping the rebate alone is sometimes enough to make up for the lack of interest charges. For instance, if a customer finances a $40,000 vehicle and takes advantage of a $5,000 cash back rebate, they'd finance $35,000. If they finance that over five years through the automaker at 4.5% interest, they’ll pay $39,150 total for the vehicle with interest.
If the automaker offers 0% interest but stops the $5,000 rebate, the customer will pay no interest over the five-year loan. However, without the rebate, they'll pay a total of $40,000 for the vehicle. That's $850 in extra profit for the automaker.
Downsides to 0% Financing
Financing at 0% interest is an enticing offer. Nothing seems better than paying for something over time without incurring extra costs. However, there are some downsides to these offers. Here’s what you need to know.
Limited Eligibility
The biggest drawback for a 0% loan is qualifying. If your credit score and credit profile don't match up perfectly with what the automaker requires for approval, you won't get it. This could lead to hours spent at the dealership only to leave without the deal you came to get.
Limited Vehicles
Auto manufacturers will often choose the most profitable models to offer 0% interest on, so if you walk in expecting to get the cheapest model and 0% financing, you're likely going to leave disappointed. These 0% financing models are often loaded with profit-building options and packages that drive pricing well above the base MSRP.
Fixed Terms
When they craft car deals, manufacturers know precisely where they need to be to maximize profit, and this includes the loan terms. A manufacturer may offer 0% auto loans, but they'll come with strict terms.
For example, the financing company may require a fixed down payment amount or limit the financing terms to 24 or 36 months, making your monthly payment significantly higher.
New Cars Only
Finally, because automakers use special offers like 0% financing to move new cars out of the inventory to make room for incoming models, you'll seldom see these offers on pre-owned cars. This means you miss out on the big savings pre-owned vehicles offer.
Save Money With Low Interest Rates Instead
Zero percent financing is an attractive offer, but you can actually save more money by building a good credit score and getting low-interest financing instead. Here's how.
Preserve the Cash Incentives
As mentioned, many 0% financing options on brand-new cars include no other incentives. In some cases, these cash incentives are a better overall deal than the 0% financing. Plus, if your credit is good enough to secure a super-low interest rate, like 3% or 4%, the savings could be even more significant.
Choose the Car You Want
If you skip the 0% interest financing option and stick with low-interest financing based on your good credit, you can get the vehicle you want instead of what the automaker wants you to get. As a result, you can get the less expensive model if you like, and save money by skipping extra options and packages you don't need.
Save Even More With a Pre-owned Vehicle
New cars can depreciate 40-50% in the first three years of ownership, so buying a three-year-old used car means it's likely already taken that depreciation. This depreciation will usually be reflected in its selling price, which can save you tons of cash upfront.
While pre-owned car financing typically has higher interest rates, you can get a loan with a rate close to a new car if it's on a relatively young used vehicle with low mileage. And even at the higher interest rate, the upfront savings will often overshadow any higher interest rate.
For example, if you bought a new vehicle at $30,000 on a 36-month loan at 0% interest, you'd pay no interest, but your monthly payment would be nearly $900 per month. Plus, by the time it's paid off, it may have lost $12,000 in value due to depreciation.
However, if you bought a three-year-old version of the same vehicle for $18,000 (40% depreciation) on a 60-month loan at 5% interest, you'd pay $2,381 in interest for a total of $20,381. That's nearly $10,000 in savings. Plus, your monthly payment would be far more affordable at $340 per month.
Save Confidently With a Clutch Pre-owned Vehicle
While the assurance of a new car is great for some car buyers, you can shop for a quality pre-owned vehicle at Clutch and save big. All our vehicles have been through a 210-point inspection and reconditioning process to ensure they're in top shape, and all vehicles purchased online come with a 90-day or 6,000-km warranty.
Plus, you can purchase your pre-owned Clutch vehicle 100% online, skipping the stress of a traditional dealership and dealing with a salesperson. We'll then deliver your vehicle to you, and you'll have a 10-day risk-free trial period with the car. If you don't love it within those 10 days, you can return it for a full refund or exchange it for another vehicle.
We also offer easy financing with an online application and quick approval. There are never any hidden fees with our financing, and we handle all credit types. We'll even take your trade-in vehicle and give you an upfront estimate on its value.
