When the time comes to purchase a new vehicle, the offers of 0% financing begin to pour in from dealerships. Many new buyers accept them. After all, 0% financing provides the best value for the money, right?
Wrong. This loan offer isn’t just misleading, but sometimes unfavorable as well. So, what is the catch with 0% financing?
What Is 0% Financing?
Put simply, 0% financing is a type of loan that does not require interest to be paid back over the life of the loan. This means that only the upfront financing costs are repaid to the lender or dealership. As you might imagine, this means that 0% financing loans are extremely difficult to qualify for, with successful applicants possessing high to extremely high credit scores.
Borrowers who comfortably make auto payments on 0% financing usually have a 20% down payment, accept shorter term lengths, and complete adequate research. This helps them avoid going "upside down" on the loan.
Why 0% Loan Financing Fails To Impress
If a certain situation seems too good to be true, you can bet that it probably is. In the case of 0% financing, the situation may be too pretty on paper to offer any real value.
If you believe that financing a 0% loan through an auto dealer will provide you with the best value, you might want to think again. In fact, signing for one of these loans may cost more than financing through Best Reward Federal Credit Union, even at a higher interest rate.
Let’s take a look at an example that helps to explain the concept.
Say a buyer wants to finance a $20,000 vehicle on the MSRP. The dealership offers a 0% financing deal for $24,000 over a term of 60 months. With no interest rate, monthly payments will be $400 a month.
On the other hand, Best Reward Federal Credit Union offers a similar auto loan. While the loan is not 0% financing, it is exactly $20,000 with a 4.50% interest rate. This will result in a monthly payment of $372.92, nearly $30.00 less than the 0% financing loan.
You must be careful to avoid getting wrapped up in the thrill of 0% deals. Although the interest costs are listed as zero, the true numbers are built into the price of the loan. Unless you’re aware of this before signing on the dotted line, you may be signing into a less than stellar deal.
Which type of loan is the best option? The real answer to that depends on a few factors.
When Is 0% Financing A Good Idea?
Opting for a 0% financing loan may be the best decision for you if:
- You have a high to extremely high credit score and long debt repayment history.
- You can contribute a down payment that is a minimum of 20% the cost of the car.
- You feel financially secure enough to make regular auto payments for four or more years.
- You are willing to take time to compare different deals and select the best option.
When Is 0% Financing A Bad Idea?
Choosing to take out a 0% financing loan may not be a good idea if:
- You have a lower credit score or shorter debt repayment history.
- You can’t support regular car payments for four or more years.
- You can’t contribute a 20% down payment to the car in question.
- You do not feel comfortable paying higher vehicle costs instead of an interest rate.
Get Auto Financing Education With Best Reward
Deciding to finance at 0% is entirely up to you. There is no right or wrong answer for choosing to take out a zero-interest loan. Ultimately, it is important to explore, question, and research all financing options before making a final decision. At Best Reward Federal Credit Union, our team is dedicated to helping you be the most educated you can be about your next auto loan and invite you to learn more about the process.
How Auto Loans Work
FAQs
Zero-interest loans, where only the principal balance must be repaid, often lure buyers into impulsively buying cars, appliances, and other luxury goods. These loans saddle borrowers with rigid monthly payment schedules and lock them into hard deadlines by which the entire balance must be repaid.
Is there any downside to 0 financing? ›
Zero percent auto loan financing may be difficult to qualify for. Those offers are usually reserved for buyers with an excellent credit rating and a long credit history. A car shopper may see the zero percent rate advertised and be attracted by the deal only to find they don't qualify.
Why do you have to be careful when considering 0% finance deals? ›
Depending on your circ*mstance, the deal may not truly save you money. There are also a few situations where special financing isn't as good as it seems, and qualifying often requires excellent credit. Check current auto loan rates and ensure interest-free won't cost you more overall.
Is 0% APR financing good? ›
While 0% APR financing seems like a great deal, it's not always the best option when you consider your budget and overall financial situation. You'd prefer a used car: With a 0% APR deal, you'll likely have to purchase a new car, which may cost more than you can afford.
Does no-interest financing hurt your credit? ›
Credit scoring models don't consider the interest rate on your loan or credit card when calculating your scores. As a result, having a 0% APR (or 99% APR for that matter) won't directly impact your scores. However, the amount of interest that accrues on your loan could indirectly impact your scores in several ways.
Why is 0 APR bad? ›
Unaffordable debt on a 0% APR card could lead to missed payments. If you don't pay the balance on a 0% APR account in full before the introductory period ends, you will get hit with interest charges on the unpaid balance at the card's regular APR.
Is 0% finance a good idea? ›
Avoiding interest is always a good goal, but zero-interest loans can lead buyers to overspend and come with a lot of strings attached. Carefully evaluate your purchase—is this what you intended to buy, and will you realistically pay off the loan within the given time?
Is 0% interest rate bad? ›
You must be careful to avoid getting wrapped up in the thrill of 0% deals. Although the interest costs are listed as zero, the true numbers are built into the price of the loan. Unless you're aware of this before signing on the dotted line, you may be signing into a less than stellar deal.
Why should you avoid interest rate deals like 0% interest? ›
You usually need a very high credit score to qualify for zero interest loans. Zero interest car loans usually come with a higher price tag, expensive extras and strict repayment terms. If you miss even one payment, you lose your 0% interest rate and get charged late fees.
Is there a catch to 0 APR? ›
Downsides of 0% APR car deals
Usually, these offers come with shorter terms, such as 48 months. That can mean higher monthly payments. No rebate: In most cases, taking a 0% APR car deal means you can't access the rebates sometimes offered by manufacturers and car dealers.
A 0% intro APR is a promotional interest rate typically offered to new credit card customers. It can apply to regular purchases, balance transfers or both. Once the introductory period ends, the variable APR for purchases and balance transfers applies to any unpaid balance.
What are the disadvantages of interest-free loans? ›
Disadvantages of Interest-Free Loans in India
- High minimum credit score:
- Concentrate on particular purchases:
- Processing fees:
- Late payment penalties:
- Impulsive purchases:
- Overspending risk:
- Missed payments:
For zero-interest credit cards, pay off the full balance each month, if possible, or pay off as much as you can. Remember, you may be charged fees and other penalties if you don't pay on time, and depending on the terms you could even lose the 0% interest rate. Don't buy more than you can afford.
Why is 0 down payment bad? ›
You might pay a higher interest rate for a no- or low-money down loan. That's because with less money tied up in the home, a mortgage lender might view you as more of a risk. Of course, the higher your interest rate, the more you'll pay overall. You'll need a bigger mortgage.
Is it bad to have zero debt? ›
“People with no debt don't have to worry too much about their credit score,” said Rob Schultz, a certified financial planner in Encino, Calif. “But other institutions may use their credit score, so it can still be important.” Consider what happens when you buy auto, home or some other type of insurance.
Is zero interest rate good or bad? ›
Key takeaways
A 0 percent intro annual percentage rate (APR) card can help you consolidate and pay down debt faster – without interest payments – if you're disciplined in how you use it. These cards typically come with a balance transfer fee, and you risk losing the 0 percent intro APR if you're late with a payment.
Is stoozing worth it? ›
Stoozing is a money hack that can help to maximise the interest you earn on your savings. It involves using 0% interest credit cards for your spending to allow you to put more money into a savings account. However, stoozing can be risky if you don't manage your credit card and finances effectively.
