Can You Finance a Car With a 0% Interest Loan?

If you are planning on financing a new car purchase, what could be better than zero percent financing? We’re talking about paying zero interest on a new car loan for up to 72 months. But before you get ahead of yourself, there are a couple of hitches to keep in mind.

First, not everyone can qualify for zero percent financing – in fact, very few people do. Second, you could do better with your own financing and a cash bonus offer from the dealer; you just need to do the math. So the answer is “Yes, you can finance a car with a zero percent interest loan, but you need to know what you are up against.”

Why Do Car Makers Offer Zero Percent Financing?

Zero percent loans are usually only available from dealers who work with captive finance companies, such as the Ford Motor Credit Company (FMCC). Ford dealers use FMCC to offer their customers financing. Each auto manufacturer has its own captive lender. When the manufacturer needs to move cars off dealers’ lots, it uses low interest financing as a buyer incentive. When the manufacturer makes this deal available, they do an advertising blitz on TV and in newspapers, so you will know when the deals come around. However, it is important to read the fine print on these advertisements. In most cases, the zero or low interest options are only available on certain models.

How Do I Qualify for Zero Percent Financing?

Before you go running down to the car dealer, you need to know who can actually qualify for zero percent financing. Zero percent loans are usually reserved for the most creditworthy buyers. A closer look at the advertisement will reveal that the offer is only available for “qualified buyers,” leaving it up to you to figure out what that means. With most car makers, zero percent financing is reserved for buyers with what they call “Tier One” credit. That still doesn’t mean much to anyone and can vary from car maker to car maker, but it’s safe to assume it refers to consumers with super-prime or high credit scores.

What About Bonus Cash Instead of Zero Percent Financing?

That’s a great question and one that deserves a closer look. From the car maker’s standpoint, bonus cash or rebate deals are really no different than zero percent financing. It’s a buyer incentive that the manufacturer will offer to help move their inventory. Very often, bonus cash offers are made alongside low or zero percent financing offers as a choice. Car buyers can choose one or the other. Less often, they are made in addition to a zero percent option.

If you are given the choice between bonus cash and a low interest financing, you may be better off with the bonus cash. You just have to do the math. For example, say you are qualified for a 3.5 percent loan and you plan on financing a $25,000 car after a $1,000 down payment. The dealer offers you a choice of a cash bonus or zero percent financing. Essentially, the cash bonus would have to exceed $2,500 to make it a better choice than the zero percent financing.

Get Preapproved for Your Own Financing First

Unless your credit score is above 700, your chances of qualifying for zero percent financing are very low. You can still look for a cash bonus offer and walk on to the lot with a preapproved loan from another lender. Regardless of whether you think you can qualify for zero percent financing; you should always check around for your best loan deal before shopping for a car. That can serve as your backup in case you don’t qualify for zero percent financing, and you will also be negotiating as a cash buyer.

Don’t Buy More Car Than You Can Afford

A word of warning in the event you do qualify for zero percent financing: Don’t buy more than you otherwise can afford. You still have depreciation working against you. Getting zero percent financing makes it tempting to spend extra money on accessories or a more expensive model. Avoid this temptation, because you still have to contend with depreciation. For that reason, you should also try to avoid financing your car for any longer than 60 months.