How to finance a car at 0% interest

Paying no interest on a new car loan may sound almost impossible. But it is possible for people with very strong credit. And it’s something you should definitely consider, because over the life of the loan it can save you hundreds of dollars. 

Rates as low as 0% are only available from the “captive finance companies,” which are the lending arms of the carmakers. So, Ford Motor Company uses Ford Motor Credit Company to lend money to shoppers who want to drive a Ford. And each carmaker has its own captive lender. 

The car companies use the low financing to attract buyers, and they make the profit on the cars rather than on finance charges. This doesn’t mean you have to get a loan from the captive finance company — car dealers are happy to accept money from any institution —but this is where you can find the lowest rates. 

How to find 0% financing

If a vehicle isn’t selling quickly enough, the captive finance company offers 0% financing as a car-buying incentive to entice shoppers to choose that model. Usually, these no-interest offers are available for only a month at a time.

Most 0% financing deals are widely advertised in newspapers and on television. However, you can go to a carmaker’s website and search for terms such as “incentives and offers” or “special offers.” For example, Ford lists all vehicles that have incentives — including 0% financing. Click on any car and you’ll see all the offers available: special finance rates, cash rebates and lease specials. Car site Edmunds.com also lists incentives from all the manufacturers and provides some details on different loan terms. 

If the car has several incentives available, such as 0% financing or customer cash back, how do you decide which is better? It depends on a number of factors, such as how long you’re planning to finance the loan. To figure out which would save you more money, run each scenario through NerdWallet’s auto loan calculator

Who will qualify?

It’s probably no surprise that carmakers will offer 0% financing only to buyers with high credit scores, though the credit ranges may vary among lenders and few dealers list their ranges. For example, to get 0% financing, a regional offer on Toyota’s website requires “well qualified Tier 1 or Tier 1+ credit customers.” Toyota dealerships define Tier 1 as an auto-specific FICO score of 690-719 and Tier 1+ as 720 and above. 

If you haven’t done so recently, check your credit score to see if you meet the lender’s requirements. If you’re unsure about how the incentive works, or whether it’s still available, you can try calling the finance or internet manager at the dealership for some information. But be prepared — often the finance manager will urge you to come to the dealership in person or encourage you to remotely fill out a credit report to see if you qualify.

Bait and switch?

Some shoppers have suggested that 0% financing is a “bait and switch” tactic by the automotive industry. The dealer advertises low rates to attract shoppers, gets them hooked on a car, then apologetically informs them that they don’t qualify for 0%. 

This might be true in some cases, but if you know your credit score, and understand the terms of the incentive, most dealers will give you the advertised offer so they can sell another car. In those cases where you fall just short of 0% financing, there might still be below-market rates available. So, instead of paying 0%, you might qualify for 1.9%. 

If you’re uncertain if you’ll meet the requirements for 0% financing, it’s smart to get preapproved for an auto loan before you go to the dealership. Once you know your preapproved interest rate, the dealer will be eager to undercut that rate to get you to finance with them. 

Make the most of low rates

Often, car salespeople will tout 0% interest saying, “Hey, it’s free money!” While it reduces the financing charges, don’t let it sway you to buy a car you can’t afford or don’t need. 

Also, avoid assuming that, since you saved so much on interest, you might as well buy extras such as an extended warranty or additional car alarms — high-profit items sold in the finance and insurance office, just before you sign the sales contract. 

As always, follow smart budgeting and car-buying advice. Here are several key points to keep in mind:

  • Down payment: Make a down payment of 20% of the car’s sale price so you won’t be upside down on the loan.
  • Loan term: While longer loan terms are available, avoid stretching the repayment period beyond 60 months (5 years).
  • Extended warranty: If you want the peace of mind of an extended warranty, you can include the cost in your no-interest loan. But decide ahead of time if you really need a warranty in addition to the included bumper-to-bumper warranty.
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