How to Qualify for a 0% APR Car Loan

How Does a 0% APR Car Loan Work?

Car loans with 0% APRs are auto loans with no interest rate. This means you can finance the purchase of a new car, and the lender will apply 100% of your monthly payment to the principal balance instead of using part for the principal and part for interest charges.

Auto loans with a 0% APR are typically only available from a dealership’s in-house financing department (not banks or credit unions) and can usually only be used to purchase new cars. Manufacturers may offer 0% APR financing to incentivize buyers to purchase certain vehicles over others when they want them to sell quickly.

Even though you won’t be charged interest on your loan if you qualify for 0% APR financing, you still need to pay on time. The lender will likely report your payments to one or more of the three consumer credit bureaus (Experian, TransUnion and Equifax), and late payments can hurt your credit scores.

How to Qualify for a 0% APR Car Loan

Qualification requirements vary by dealer, but generally, you need to have:

• Good credit: No-interest auto loans are typically reserved for borrowers with strong credit profiles.
• Adequate income: Even though you don’t have to pay interest on your loan, you still need to demonstrate that you can afford to make the monthly payments.
• Low debt: Your debt-to-income ratio (DTI) is one of the factors lenders review to determine whether you can afford your payments each month. Reducing your DTI may improve your chances of qualifying.

What to Know About 0% Financing

Financing your vehicle purchase with a 0% APR loan can be a good way to get you into a new car, but it may not be right for everyone. Before opting for a no-interest loan, there are a few things to know.

• You may not have your pick of vehicles. Dealers don’t usually offer 0% APR financing on all makes and models. If you want to score a 0% APR financing deal, your choices will likely be limited.
• Your payment may still be high. There’s no doubt that a 0% APR loan will save you money on interest, but that doesn’t necessarily mean you can afford the loan. Run the numbers to determine whether the payment will fit into your budget and how repaying your loan may affect your ability to achieve other important financial goals.
• Repayment timelines can vary significantly. Some 0% APR offers come with relatively short repayment timelines like 36 months, and others may have extended timelines like 72 months. Lengthier terms reduce your monthly payments, but locking yourself into a long-term financial commitment can make saving for other goals more challenging.
• No interest doesn’t mean no cost. Not paying interest can save you thousands over the life of a loan, but it won’t eliminate all the costs associated with buying a car. You’re still responsible for taxes, title, registration and other fees. Additionally, the dealer may offer you add-on products like extended warranties, credit insurance and gap insurance. Do your homework on optional products before heading to the dealer, and avoid purchasing coverage you don’t need.
• Understand what you may be giving up. Taking advantage of a 0% APR loan might sound like a no-brainer, but it may not always be your best option. In addition to 0% APR financing, dealers sometimes offer cash rebates that can shave hundreds or even thousand dollars off the purchase price. However, you often can’t combine offers. Run the numbers to determine whether the special financing or a rebate makes more sense based on your finances.

Alternatives to 0% Financing

If you don’t qualify for or don’t want 0% APR financing, that doesn’t mean you’re out of luck if you want to buy a car. Here are some alternatives to consider.

• Get a traditional auto loan. You may be able to qualify for a loan with a low interest rate from a bank, credit union or the dealer even if you don’t qualify for 0% APR financing from the dealer. Shop around and compare rates and terms from several lenders to find the lowest interest rate you’re eligible for.
• Pay cash. If you don’t need to replace your current vehicle immediately, consider saving up to pay cash for your car. It’s another way to avoid interest charges.
• Buy a used car. An auto loan with 0% percent financing is typically only available on new vehicles, but buying a used car can be a more budget-friendly option with a lower purchase price that results in reduced monthly payments.

Preparing to Apply for a 0% APR Auto Loan

Since 0% APR auto loan financing is generally only available to buyers with stellar credit, it’s a good idea to see where you stand before heading to the dealership. Check your credit scores before you start shopping to find out how likely you are to qualify for a 0% APR offer, and remember to check your credit reports as well.

If your credit needs some work and you don’t need a car right away, consider postponing your purchase and taking steps, such as getting all your accounts current and reducing your credit card balances, to improve your credit. Every positive move you make will get you closer to qualifying for ideal rates and terms when you buy a car.