Labor Day weekend is traditionally a big auto buying weekend. You'll find dealers sales tempting you with discounts, incentives, and even those 0% financing offers. Before you hit the dealers, we've got some smart-borrowing advice to help you evaluate whether 0% financing is right for you.
What 0% Financing Really Means
An auto loan without any interest sounds like a dream come true. If there's no interest rate, then the vehicle will be less expensive, right? The answer is―maybe.
A 0% vehicle financing offer means the financer is offering to lend you money without charging you any interest over the life of the loan. You'll typically find 0% financing on slower-selling or older models. While it can be difficult to qualify for one of these loans, the math could add up as long as you have a long credit history, a score well above 700, and enough income to make larger monthly auto loan payments. But do the math, because 0% financing could end up costing you more.
No Negotiations or Special Offers
With 0% financing, most dealers will not negotiate on price nor will they typically offer you special discounts or incentives. This can make the vehicle slightly more expensive over the life of your loan when compared to a traditional loan where the dealer will often offer incentives and a negotiated sticker price. The right answer for you all depends on your credit score, those dealer incentives/rebates, and your negotiating skills.
Let's Compare
Let's look at an example based on a $20,000 vehicle. For simplicity, we did not include taxes and registration fees so those would be extra.
| 0% APR1 | 3.49% APR1 | |
| Sticker Price | $20,000 | $20,000 |
| Dealer Discount | $0 | -$1,000 |
| Dealer Incentive | $0 | -$1,000 |
| Vehicle Price Less discounts/Rebates | $20,000 | $18,000 |
| Total Financed | $20,0002 | $19,6423 |
| Max Term | 48 months | 60 months |
| Monthly Payment | $416.66 | $327.37 |
1APR = Annual Percentage Rate. Tax and vehicle registration fees extra.
2Payment example represents 48 monthly payments of $416.66 per $1,000 financed. Tax and registration extra.
3Payment example represents 60 monthly payments of $327 per $1,000 financed. Tax and registration extra.
With 0% financing, the actual cost of the vehicle is more because the dealer is not offering discounts and incentives. Plus, the monthly payment is higher. Sure, you'll pay off the loan faster, but it'll cost you more in the long run. If you need a lower monthly payment and you can negotiate some dealer discounts and incentives, then that 3.49% APR will actually cost you a bit less, but it will take you longer to pay off.
Do Your Own Research
Our best advice? Watch our Car Buying Tips video, and use our Auto Payment Calculator to do your own math and see what works best for your budget.