0 APR Guide: What You Need To Know Before Financing a Car - Kelley Blue Book

0 APR Quick Facts

0 APR means no interest
Borrowers need gold-plated credit to qualify
Most 0 APR car loans are for 36-48 months
0 APR loans apply to very few models

Inflation persists, and as a result, interest rates continue to climb. At the same time, demand for new and used cars is declining. It’s fair to think that somewhere in all of this, there must be at least a few deals out there for car shoppers. There are — but you must still search high and low to find them.

One area where you are likely to strike gold is carmaker financing. Cashback offers and rebates are slowly creeping back into carmaker-sponsored financing. In other words, Ford through its Ford Motor Credit, Nissan through its Nissan Finance, Stellantis through its Chrysler Capital, and so forth are loosening the purse strings. Such carmaker-controlled finance divisions are called “captive finance companies.” They work hand in hand with the carmakers to help move slower-selling models off dealer lots with financing deals.

As dealer lots repopulate with vehicles, auto manufacturers are returning to financing incentives to keep their inventories turning. Although 0 APR offers are still few and far between, we think it’s an ideal time to fill you in on what 0 APR is, how it stacks up against cashback programs, and how you may benefit.

What Does 0 APR Mean?

We could wade deep into the weeds, but we’ll keep this simple. Seeing 0 APR basically translates into free money. That is, a 0 APR car loan is one in which you only pay back the amount you borrowed (the principal) and no interest. Interest is what the lender charges you for the money you borrow. With a 0 APR loan, there is no interest charge. What does that mean in savings? Let’s use the car-loan payment calculator from our sister site Autotrader.

If you buy a car and wind up financing $25,000 at 5% interest for 60 months, your monthly payment will be about $472. That works out to a total of $28,320 you will pay the lender over the length of the loan. If you finance that same $25,000 at 0 APR for 36 months, it works out to roughly $694 per month with a total payback of $25,000. At 0 APR, you will pay $222 more each month but save $3,320 in interest over the life of the loan.

Does 0 APR Mean No Interest?

For car loans, 0 APR does indeed mean no interest is accrued. Unlike limited promotional 0 APR offers from credit cards, a 0 APR car loan is for the contractual length of the loan. That is, 48 months if it’s a 48-month loan, 36 months for a 36-month loan, and so forth.

Promotional credit-card offers for 0 APR usually only apply to a set number of months (12-24) during which there is no interest. After that promotional period ends, you will pay an interest rate on the amount of the card balance carried over each month. This is not the case with 0 APR car loans. You won’t pay a penny over the principal if you make the monthly payments according to the loan contract.

How Does a 0 APR Car Loan Work?

We’ve already established that the captive finance arms of the carmakers offer 0 APR loans to help carmakers move unwanted inventory off their dealers’ lots. That doesn’t mean the cars involved aren’t good vehicles. It just means the carmaker has more of that model on dealer lots than it wants.

How Long Do 0 APR Loans Last?

Currently, if you find 0 APR financing on a vehicle, it will probably be for 48 months or less. In fact, many are limited to 36-month terms. However, theoretically, even though most 0 APR deals are for shorter terms, they can be for any length of time. They are often shorter loans because the lender isn’t charging for the use of its money. Consequently, the idea is to minimize the time the lender’s money is tied up in your no-interest loan.

How Can Lenders Justify No Interest Car Loans?

It’s called marketing. A 0 APR offer is a marketing tool to get us into the dealer’s showroom. Yes, if your credit is good enough (more about that later), the carmaker is more than happy to give you a short, no-interest loan to move excess inventory off the lot. However, even if you don’t want a model with the 0 APR deal or you can’t qualify for the no-interest rate, the odds are good that you will still buy a vehicle. A dealership generates most of its profits in the parts and service departments. It also makes money from extras (extended warranties and so forth) sold in the business office. In other words, any profit is good profit.

Why Do Some Carmakers Offer 0 APR and Others Don’t?

New-car inventories have been razor-thin since the COVID-19 pandemic. With fewer vehicles on their lots, many dealers marked up prices over the manufacturer’s suggested retail price (MSRP). They still sold every car they could get their hands on. Consequently, most carmakers haven’t needed to offer no-interest financing. In many cases, dealers have been selling vehicles as fast as they roll off the transport trucks. Furthermore, a few carmakers simply don’t offer many sales incentives, no matter the current sales trends.

Can the Lender Cancel a 0 APR Loan for a Missed Payment?

Yes and no. The lender can cancel any car loan if you miss even one payment. Usually, your loan contract provides a grace period for missing a due date: five days, 10 days, or whatever. If you don’t make a payment within that grace period, the lender is within its rights to repossess the vehicle. In essence, it would be canceling the loan. That rarely happens with one missed payment because the lender doesn’t want your car; it wants your money. However, it makes sense a lender will probably be less understanding where no-interest loans are concerned. On the other hand, the lender won’t pull your 0% interest deal out from under you for one late payment. In other words, you won’t suddenly be paying 5% interest on your 0 APR loan because you were late with a payment.

0 APR vs. Bonus Cash

Often, where you find a 0 APR offer, you will find a cashback or bonus cash offer, as well. That is, you are given a choice between 0 APR financing or some cashback amount. You’ll need to do a little math to decide which is more beneficial to you. Big cashback offers right now are as rare as 0 APR loans, and you may need to act fast when you see a deal.

The primary determining factor will be how much you plan to finance. A 0% interest rate is a much bigger deal when you are financing $30,000, than when you are borrowing $10,000. Cashback bonuses are a standard amount: Let’s say, $1,000. You will get that amount whether you finance $30,000 or $10,000. The catch is, what interest rate will you have to pay to take the cash rather than the 0 APR? That’s where the math comes in.

Let’s keep things simple and say you are going to finance $20,000. The 0% car loan is for 36 months. You will pay roughly $556 per month, totaling $20,000 at the end of 36 months. If you take the $1,000 cashback, let’s say you then finance $20,000 at 5% for 60 months. That works out to roughly $377 per month or a total of $22,620 over 60 months. The difference over the term of the loan of $2,620, minus the $1,000 cashback or $1,620 more you would pay in interest with the cashback deal.

Of course, the big question here is, can you — or do you want to — swing $556 per month for the no-interest loan? That’s a question only you can answer.

How To Get No-Interest Car Loans

Currently, one of the challenging aspects of getting a 0 APR car loan is finding the deals. For example, a handful of no-interest loan offers may have been available last week. But automaker incentives have expiration dates, much like discounts, specials, and promotions for other consumer products.

What Credit Score Do I Need to Qualify for 0 APR?

Only borrowers with gold-plated credit usually qualify for 0 APR financing deals. That means you need a credit score in the Super Prime category that Experian pegs at 781-850. Moreover, some captive finance companies won’t consider a borrower below the 800 bar for a no-interest loan.

If a lender digs deeper than your credit score, it will probably also weigh the ratio of your debt to your annual income, your employment history, and your payment history.

Having said all of that, lenders set their own parameters for making loans. They look at borrowers on a case-by-case basis and make decisions based on their own requirements. Even if you are planning to go for a 0 APR loan, you should reach out to your bank or credit union and get preapproved for the vehicle you are considering. Knowing what your own financing will cost is good information to have when weighing offers in the dealer’s business office.

Are 0 APR Car Loans Worth It?

We are big fans of using other people’s money for free. This is especially true when we’re talking thousands of dollars for a car. Our general answer is yes, zero-interest loans are worth it. However, using someone else’s money for free might be the only advantage. So, here are some pros and cons of no-interest car loans.