With the average monthly payment for new cars nearing $650 and used around $500, according to data from Experian for the first quarter of 2022, the most important thing is to find a bargain. and closing a car deal with a 0 percent annual interest rate is one way to save money on your next car purchase.
Many automakers offer interest-free auto loans to attract well-qualified new customers and sell more vehicles. however, when shopping for a new vehicle, you should always proceed with caution, even if there is a zero rate offer on the table. In some cases, getting an auto loan from a third-party lender may be better in the long run.
what is a 0% of April?
An interest-free or 0% APR car deal basically means you’re borrowing money for free. Your monthly payments reimburse the lender for the money you paid the car dealer, but any extra money out of your pocket goes into the lender’s bank account.
This differs from the usual approach when you take out a vehicle loan where the lender charges you interest in exchange for the financing. After all, interest and fees are the main ways lenders make money. As you pay off the loan, you repay the lender for the money you paid the car dealer on their behalf. the interest you pay helps the lender make a profit.
how does 0% april work?
financing a car without interest sounds too good to be true. but these financing deals are a tool automakers can use to sell more vehicles.
Lenders that offer 0 percent financing are known as captive finance companies and are tied to the automakers themselves. Some examples of captive lenders include Ford Motor Credit, GM Financial, Nissan Finance, Toyota Financial Services, and more. So if Ford wants to sell more F-150s due to overstocking issues, it could offer zero-interest rate loans to select borrowers through its own finance arm.
Interest-free financing seems more affordable on the surface, but this is not always the case. When automakers offer 0 percent financing, they may try to make up for “lost” revenue in other ways. For example, a dealer may go to great lengths to sell you add-on products, such as extended warranties or differential insurance, with your vehicle. You may also have to forego benefits such as rebates that would normally reduce the purchase price.
how to qualify for an april 0% car offer
Zero percent financing offers are generally reserved for borrowers with excellent credit, typically classified as having a credit score of 800 or higher. You’ll want to review your credit reports on your own before you start shopping for auto financing. Each lender also has its own definition of excellent credit, and qualification requirements can vary from vehicle to vehicle.
Because zero-APR qualification standards vary widely, your best bet is to call your car dealer ahead of time. ask what criteria you must meet to qualify for interest-free financing on a specific vehicle. In addition to your credit score, an auto lender may consider additional factors when reviewing your application, such as:
- debt-to-income ratio.
- employment history.
- income and address verification.
Regardless of your credit condition (good, bad, fair, or excellent), you should also take the time to seek pre-approval from outside financing sources. Preapproval can help you compare your options and provide a backup plan if you don’t qualify for the automaker’s exclusive offer.
financing limits 0% abr
Interest-free financing can be a great deal for some borrowers. Still, there are some potential pitfalls to be aware of when considering this type of financing.
- Limited Selection: Interest-free financing may only be available on certain types of vehicles. First of all, the car you buy will almost certainly have to be new. automakers also often reserve special financing offers for vehicle models where there is excess stock that they need to move.
- limited payment options: depending on the offer, your payment options with 0 percent financing may be more limited. often, you’ll have less time to repay the loan than you otherwise would. Of course, there’s nothing wrong with paying off a loan quickly, but you want to make sure you can afford the higher monthly payment without straining your budget.
0% financing vs bonus cash
Automakers want you to buy your next vehicle from their company, not a competitor. This is a key reason 0 percent financing offers exist in the first place. In the same interest of attracting new customers, automakers often offer additional cash rebates to buyers.
Unfortunately, an automaker may not allow you to take advantage of both 0% financing and bonus cash. If you’re faced with this dilemma, you’ll need to decide which savings opportunity is best.
Bank Rate Tip: Using an auto financing calculator can help you compare apples to oranges when it comes to 0% financing versus bonus cash incentives. sometimes taking the cash back offered by a car dealer along with a higher annual interest rate will make more sense in terms of overall savings. in other cases, 0 percent financing could be the clear winner.
Should I take the cash and refinance later?
You may be required to accept standard financing through the automaker’s captive lender to qualify for certain types of cash incentives. In return, there’s a chance you’ll receive a higher interest rate than you would through your bank or a third-party lender.
Depending on your situation, refinancing your new auto loan in a few months can be an effective strategy. but there are some disadvantages to consider first. That is, getting two auto loans in a row, the original and the refinancing one, could hurt your credit for a while.
multiple loans will result in at least two credit inquiries on your credit reports. Adding two loans to your credit reports, even if one pays off the other, can lower the average age of accounts on your credit reports. In terms of credit rating, the higher the average age of your accounts, the better.
when is a 0% april sale not worth it?
It might make sense to waive special manufacturer financing offers in the following situations.
payment terms do not fit your budget
Low interest auto loans often come with shorter financing terms. Depending on your income, a shorter loan term could make your monthly payment unaffordable.
For example, if the 0 percent car loan lasts four years in instances where you would normally finance for five years, the cost difference can be significant. With a four-year, $25,000 auto loan from the manufacturer, your monthly payment would be about $520. By comparison, a $25,000 car loan financed over five years at an interest rate of 4 percent would represent a monthly payment of $460. You can use an auto loan calculator to calculate your potential loan.
Financial experts often recommend keeping your monthly vehicle payment to 20 percent or less of your net monthly payment. and some experts suggest that you limit your car payments to 10 percent of your gross income.
you are tempted to buy a more expensive vehicle
You shouldn’t decide to increase your car budget just to qualify for special financing. If you were planning to pay $10,000 cash for a used vehicle, getting a new car loan priced at $30,000 just to take advantage of interest-free financing is probably not a good financial decision.
cash rebates offer you more savings
Cash rebates are often waived for buyers using special manufacturer financing. If you look at the numbers and cash rebates offer you a greater opportunity for savings, a 0 percent financing deal might not be worth it.
Suppose you can take advantage of a $4,750 cash back offer on the purchase of a new vehicle. on a new vehicle with a $30,000 sticker price, that incentive could lower your purchase price to $25,250. If you financed $25,250 at a 4 percent interest rate for five years, you would pay $2,651 in interest. In that scenario, your total cost would be $27,901, as long as you don’t add additional products like extended warranties or incur any other financing fees.
Alternatively, you can pay the full purchase price of $30,000 and opt for a 0% annual interest rate. Assuming no additional products or fees, you’d still pay $2,099 more in this scenario than you would if you accepted cash back.
do’s and don’ts of 0% interest rate offers
If you review your options and decide that a 0 percent APR auto loan is the best option for you, these tips can help you navigate the process.
- negotiate the purchase price before applying for the 0 percent April offer.
- accepting a short-term loan with a high monthly payment amount that you cannot afford.
- Get pre-approved for a car loan before you visit the dealer.
- opt for a long-term loan to lower your monthly payment if it will cost you more overall.
- Confirm that you can afford the monthly payment.
- Choose 0 percent financing instead of a cash-back incentive without comparing potential overall savings.
- See if the manufacturer offers a cash back incentive program that you can combine with the special financing offer.
- skip the down payment if you can afford it.
the end result
The key to deciding if a car offer with a 0 percent APR is worth it to you is to compare it to an auto loan from a third-party lender and find its true monthly cost. Depending on your circumstances, the offer may not save you money. There are also some situations where special financing isn’t all it’s cracked up to be and qualifying often requires excellent credit. Check current auto loan rates and make sure interest-free loans don’t end up costing you more overall.
- auto loan calculator
- current auto loan rates
- how much car can i afford?