Should You Choose a Zero Percent APR Loan on a New Vehicle?

(Brendan McDermid/Reuters)

Borrowing money for nothing sounds like a good deal. Zero percent financing on a new vehicle allows you to borrow money without paying interest or bank fees.

But is this a good deal, or is there a catch? What are the advantages and disadvantages?

Zero Percent APR Car Loan

Usually, when you take out a vehicle loan, interest is charged on the financing. The interest rate is dependent on your credit score, term, type of vehicle, and loan amount.

Zero percent APR financing is a loan that doesn’t charge interest. Instead of paying interest, your monthly payments go directly toward the principal from the loan’s inception.

Most zero percent financing is offered on selected new vehicles or, in rare cases, specified pre-owned vehicles. Generally, lenders don’t offer this type of financing. Instead, zero percent financing is offered through a car manufacturer.

Qualifying for a Zero Percent APR Loan

Qualifying for a zero percent loan isn’t easy for most people. In fact, it’s quite difficult. Most zero percent financing plans require a 750 or more credit score. The financing doesn’t apply to every vehicle on the lot. Only designated vehicles qualify.

Advantages of Zero Percent APR Car Loan

You only pay back the principal with a zero percent APR loan. This allows you to save hundreds of dollars on payments. If you have an excellent credit score and know you'll make every payment on time, zero percent APR may be worth it.

Disadvantages of Zero Percent APR Car Loan

One of the biggest disadvantages of using zero percent APR financing is the price of the vehicle. Keep in mind that dealerships make money on the back end. When you finance a vehicle, they receive a piece of the financing. They need to make that up if you’re going with an interest-free loan. So, they may not be so generous when negotiating a purchase price.

They also will try to tack on extras to the price. For example, some financing plans require gap insurance, which pays the difference between what you owe and what the car is worth if it’s totaled.

Dealers will try to sell you an extended warranty. These are also called vehicle protection plans. It looks like they’re trying to help, but in reality, they need to make up for the loss they’re taking from the financing plan.

The list includes tire and wheel protection, key protection, paint, and fabric protection, etc. Naturally, the temptation for buyers is to just add these on. After all, they’re not paying interest.

Loan Term Shorter

Zero percent financing is usually available for specific terms. The auto loan term is usually 48 months or less. The average zero percent APR financing loan term is 36 months. Most car loans, with interest, will go as long as 84 months.

The shorter loan comes with a higher monthly payment that may not be affordable to many buyers. If you’re buying a $25,000 vehicle with zero percent APR financing, it will require a $521 monthly payment. But if you have 3 percent interest over a 60-month term, it will cost $449 per month. The bigger payment may be a deciding factor.

If a payment is missed or late, interest could be added to the loan. Now you have a higher monthly payment and a shorter time to pay it back.

Rebates May Disappear With Zero Percent APR Financing

Some auto manufacturers offer rebates on selective vehicles. These rebates can equal several thousand dollars. They act like credits toward your new vehicle. These rebates are usually unavailable if you go with a zero percent APR Loan.

Keep in mind the final cost of the vehicle is what you’re taxed on when you drive off the lot. A rebate brings the price of the vehicle down. This brings what you pay in sales tax down as well.

Paying the interest and having a rebate may be a better deal than the zero percent APR loan.

Run the Loan Numbers

Suppose you’re planning on buying a new car. You should run the numbers. Contact your bank or credit union and get pre-approved. You'll know your interest rate upfront.

Then go to the dealership. If the vehicle you want offers zero percent financing and you qualify, dig a little deeper. Take the rebate off the price and evaluate the monthly payment with your financial institution’s loan.

It takes a little number crunching, but it could save you on your payments and sales taxes. It forces you to look at the bigger picture.

Are Zero Percent APR Loans Better?

Up front, it looks like a great deal, but it may not be for everyone. If you qualify for zero percent financing, ask the dealer about any fees. Sometimes there’s an application fee. Also ask if you are required to purchase add-ons like gap coverage or an extended warranty.

Always double-check what rebates are available and if you can still use them. Once you have this information, you can make an informed decision.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.