How Does 0% APR Car Financing Work, and Is It Worth It?

Financing a car is easily one of the least fun and most frustrating parts of buying a car. Trying to weigh annual percentage rates (APR) against types and lengths of loans while considering different monthly payment options or additional offers like deferred payments can be exhausting and overwhelming. So, when you’re offered 0% APR financing on your car loan, you have to take it, right? 

But is zero-interest financing too good to be true?

Yes, you can buy a car with no interest

A black adding machine with a strip of black machine tape coming out, laying on an orange tape; calculating car financing rates is an important part of the buying process
Adding machine | Towfiqu Barbhuiya via Unsplash

If you decide to pursue car financing instead of paying cash for your next vehicle, you’ll likely be considering interest rates when shopping around for a loan. MarketWatch reports that the average interest rate for new-car auto loans is 3.86%. Used cars have an average auto loan interest rate of 8.21%.

However, that average can often be skewed when automakers and lending partners offer 0% APR financing on new cars. It is just what it sounds like: buy a car for a set price to be paid over a fixed term, and pay no interest the entire time.

So, what’s the catch with zero-interest car loans?

How does 0% APR work when buying a car?

Two men stand together looking at a laptop inside of a business; 0% APR car financing is an attractive option for shoppers
Discussing sales and financing | LinkedIn Sales Solutions via Unsplash

Technically, it works just the same as any other car financing interest rate. Take the rate that a lender has approved, add in any additional fees, and you get the APR. There isn’t a catch, but there are some considerations. The automaker still needs to make money somehow. Companies may find that extra money by raising the price of the vehicle, selling extended warranty coverage, or pushing accessories or equipment.

Companies typically reserve 0% financing for shorter loan terms—between 36 and 60 months. Longer financing terms, like Honda’s new 84-month option, are less likely to offer cheap financing rates. Depending on your credit score and situation, extended financing term rates typically fall in the 3-8% range, though they may be higher. These rates are higher because the lender has to wait longer to get their money back.

Zero-interest financing rates may also remove the possibility of rebates or cashback and may mean a more limited selection of vehicles from which to choose. Companies also reserve the best car financing deals for shoppers with the best profiles. 

Who’s eligible for zero-interest car loans?

While a brand often advertises 0% interest car loans to everyone in its audience, not everyone will qualify for it. A shopper typically needs to have an excellent credit score (around 750 or higher) to be eligible for these car loan deals. An average or poor credit score is not a strong enough signal to the lender that you’ll be able to pay back that loan—and with no interest collecting, the lender has little incentive to trust you.

For example, MarketWatch lists the average car loan interest rate for abysmal credit scores (300-500) at 12.53% for new cars and nearly 20% for used vehicles. Car financing for bad credit is more expensive and harder to get, but it’s not impossible.

If you don’t qualify for prime financing rates, you may still be able to negotiate your interest rate or, at the very least, negotiate the price of the vehicle to save some money. Remember that financing a car can build your credit score, so you may need to take the hit with a higher interest rate, but your next vehicle purchase should be easier down the road.

Is 0% interest financing worth it?

It’s hard to say definitively if 0% APR car financing is worth it for you, but there are a lot of benefits to avoiding interest when you buy a new vehicle. 

To make sure you’re getting the best deal, shop around and price out exactly how much the car will cost you over time. A less-expensive vehicle with 0.9% financing may be cheaper overall than a more-expensive car with that shiny 0% financing offer.

RELATED: What Happens If I Get Denied on My Car Loan After Getting Approved?