Should you take advantage of zero-interest auto loans?

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Ask a Lender
November 18, 2016 | Updated September 26, 2017


Key Points

Zero-interest car loans

  • You need a high credit score to qualify.
  • Zero-interest loans typically come with a shorter term and higher monthly payments.
  • Compare zero-interest loans to other promotional offers such as a rebate.

You’re in the market for a new car. You hear a radio or TV ad offering zero-interest financing at a local car dealership. Should you take the dealership up on its offer?

The answer is maybe — it depends on whether or not you meet the stringent criteria needed to qualify for such a loan, and whether you can save more money with other offers.

What is a zero-interest loan?

A zero-interest loan means you don’t have to pay interest on the loan, just on the principal balance. Dealerships often promote zero-interest financing offers in the summer, when they’re trying to clear inventory to make room for new vehicles.

Zero-interest loans are primarily a tool dealerships use to get customers through the door. Often, customers who are enticed by zero-interest offers come into the dealership, but don’t qualify. The dealership then pitches an alternative offer that does carry interest.

If you are able to qualify for a zero-interest loan, it is a potentially good deal. So what do you need to do to ensure you qualify?

How to qualify for a zero-interest loan?

To qualify for interest-free financing offers, borrowers often must have stellar credit.

Only a small percentage of borrowers qualify for zero-percent financing offers. Generally, only consumers with the highest credit scores qualify, according to the Consumer Financial Protection Bureau. A borrower typically must have a credit score of 720 or greater to qualify, although dealerships might sometimes accept a lower score.

Check your credit score before you head to the dealership or ask your auto loan lender. Check for incorrect, negative errors, because these could hurt your score and diminish your chance of qualifying for the promotional financing offer. Even if you don’t qualify for zero-percent interest, maximizing your credit score can help you get a better interest rate.

Zero-percent loans often have very short terms — 36 months or less, in most cases. That can be a good deal, as you pay less interest over the course of the loan. The drawback is that your monthly payment is higher.

Consider other deals

Dealerships often offer more than one incentive at the same time. They might offer either a zero-interest loan, or a cash rebate, but usually not both. Crunch the numbers and see which option ultimately saves the most money.

See if your bank or credit union will pre-approve a car loan for you at a fixed interest rate. If you end up seeking financing through the dealership, this can help you negotiate a better rate.

Dealerships may be less flexible when negotiating the price of the vehicle itself if they know you qualify for zero-interest financing, so make sure you’re not ultimately paying more for the vehicle than you would with a loan from a bank or credit union.

Watch out for fees

Some zero-interest loans must be paid back in full by a specific date. You could be hit with penalties if you fail to repay the loan on time. Failing to meet the deadline — or even being late on a single payment — could result in the lender rescinding the zero-interest agreement and backdating interest over the entire term of the loan. Make sure to read the terms of the loan carefully and take note of any fees or penalties.

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