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It may sound too good to be true, but getting a car loan with a 0% annual percentage rate (APR) is possible. These loans are typically only provided in certain circumstances, however, and to borrowers with stellar credit histories.
If you're in the market for a new car, here's how you can get a 0% APR car loan.
How Does a 0% APR Car Loan Work?
Zero percent APR car loans are auto loans with no interest rate. This means you can finance a new vehicle purchase, and 100% of your monthly payment will go toward the principal balance of the loan—there are no interest charges whatsoever.
Car dealers usually offer 0% financing on new cars only, and you typically need to have a very strong credit history to qualify for such an offer.
These promotions are typically available only from what are called captive financing companies—the finance arms of vehicle manufacturers, such as Ford Motor Credit Co. or Toyota Motor Credit Corp. Manufacturers use these deals to incentivize customers to purchase brand-new vehicles, which sell at a significantly higher cost than used vehicles. You may receive an advertisement from a local dealer that encourages you to check out a new car and apply.
How to Qualify for 0% Financing
It's possible to qualify for a car loan even if you have bad credit, but having a good credit score is important if you want to qualify for a low interest rate. And if you're hoping to score a 0% APR car loan, you'll likely need a very good or exceptional FICO® Score☉ , which means a score of 740 or above.
Before you start shopping for a new vehicle, take some time to check your credit score to see where you stand. Also, get your credit report from one or more of the national credit reporting agencies (Experian, TransUnion and Equifax) to see where you stand. You can get a free report once a year from each agency at AnnualCreditReport.com. Experian also offers a free credit report every 30 days on sign in.
Review your credit report and make sure to file a dispute with the credit bureaus if you find anything you believe is inaccurate or the result of fraud. The bureaus investigate these potential discrepancies and will revise or remove them from your credit report if they find that they're inaccurate or fraudulent.
Also, take note of any actions you can take to improve your credit:
- Always pay your bills on time.
- Pay down your credit card balances.
- Avoid closing old credit cards.
- Apply for new credit only if you need it.
If you've made late payments or have other negative credit items on your report, it may take a while for your credit history to recover enough to qualify for a 0% APR car loan. If you don't need a car right away and can work on improving your score, you may qualify down the road.
What to Keep in Mind When Considering 0% Financing
You may wonder if 0% APR car loans come with a catch. The answer is yes, there are some potential drawbacks to consider:
- Dealers may try to make up the cost elsewhere. In some cases, dealers may increase the sales price of the vehicle or add pricey fees to the contract to make up for the interest savings that you gain. Also, you may experience pressure to buy add-on products, such as a maintenance package or gap insurance. To maximize your savings, do your research on car prices and avoid products you don't need.
- Payments can still be high. If you're buying a brand-new car, the monthly payment may be high even without interest charges added on. Run the numbers on your budget to determine whether you can afford the loan payments and how they might impact your ability to work toward other important financial goals.
- They typically come with long repayment terms. To help reduce the cost of the monthly payment, dealers may encourage you to apply for a loan with a long repayment term—some go as high as 72 or even 84 months. But locking yourself into such a long financial commitment like that can make it challenging to make meaningful progress with other money goals. If you can afford it, opt for a shorter repayment term.
Also, keep in mind that you can negotiate the car loan and the terms of the sales contract. Do your research on car prices, fees, add-ons and other aspects of the car-buying process before you head to the dealership, so you can gain some leverage.
Alternatives to 0% Financing
If you don't qualify for a 0% APR car loan, you still have other options. Credit unions, banks and auto finance companies all offer low interest car loans that may fit in your budget.
To find the lowest interest rate that you can qualify for, it's important to shop around and compare rates and terms from several lenders. In addition to the interest rate, also look at loan repayment terms, prepayment penalties and other features that could impact your financial situation.
This process can take some time, but it's essential to help you get a car loan that fits your budget and maximizes your savings.
Monitor Your Credit Even After Getting a Loan
Whether you qualify for a 0% APR car loan or opt for an alternative rate, it's important to continue to stay on top of your credit in case you need to apply for credit again in the future.
Experian's credit monitoring service not only offers you free access to your FICO® Score powered by Experian data but also provides customized alerts on credit report activity, notices when your account balances change, and gives you the chance to increase your credit score with Experian Boost®ø.