You hear 0% APR and you get excited. You can buy a car with no interest? Where do you sign up?
Before you jump at the ‘chance of a lifetime’ learn about the interest-free car loan. It may not be the impressive deal it seems to be.
First, you need ‘great’ credit to qualify. If you don’t have a top credit score and low debt ratio, your chances of approval decrease. Even if you meet the requirements, it still may not be a great deal.
What are Interest-Free Car Loans?
As the name suggests, an interest-free car loan has no interest. The amount you borrow to buy the car is all you owe. The bank doesn’t charge interest on the amount.
On a typical car loan, you’d pay the principal balance plus a small amount of interest each month. For example, a standard $20,000 car loan at 4% interest for 60 months would cost $22,100 over the life of the loan or $2,100 in interest.
What’s the Catch?
While you can get a car loan for 0% interest, the automaker must still make a profit. So how does it work?
First, the 0% APR isn’t from a bank – it’s from the automaker. That’s why they need ‘great credit.’ They aren’t a bank, but rather the manufacturer trying to sell more cars. The automaker makes money on the sale of the vehicle. While they have to wait until you pay the loan off to receive the full amount, they still make the money.
Second, the automaker may increase the price of the car. If you’re taking advantage of the 0% APR, they may not negotiate the price of the car and they won’t offer other incentives. Make sure you look at the big picture when accepting the 0% APR.
What’s the Bottom Line?
Look at the bottom line. How much will the loan cost? Look at both options – an interest-free loan and a loan with interest. Ask the dealer for a price both ways. You may find taking the loan with an interest rate above zero makes more sense if the dealer will give you a lower price for the car.
Compare it to a Used Car Offer
Ask yourself if you were in the market for a new car in the first place? Did the 0% APR catch your eye and you figured you’d try it? Can you afford the payment?
If you weren’t in the market for a new car, look at your used car options and compare them. You’ll pay a higher interest rate for a used car, but with the lower car price, the payment may be more affordable. Don’t let the 0% interest tempt you.
An interest-free car loan works for certain people, but not everyone. Even if you qualify, look at all your options. Know what the loan costs over the life of the loan and how much you save by not paying interest. When you compare it to other offers, you may find you aren’t saving as much as you thought.