Is Zero-Percent Financing a Good Deal?

Jun 29, 2020

Automakers feeling the pinch are offering zero interest loans to get you into the showroom or to their website. But are no-interest loans a good deal compared to cash rebates and incentives?

While an auto loan without any interest sounds great, there are a few things to consider before deciding to take out a zero-percent financing loan. Let’s take a closer look.

What is zero-percent financing?

An auto loan offer of zero-percent financing means the dealer is offering to lend the buyer money without charging any interest over the life of the loan.

With traditional loans, the lender is willing to extend money to the buyer because the lender benefits from the interest payments over the life of the loan. A zero-percent car loan, though, offers no reward for the lender. In fact, the loan is actually being offered by the auto manufacturer. Automakers may offer zero-percent financing on slower-selling models or to help clear out inventory to make room for newer models.

Can anyone qualify for zero-percent financing? 

Zero-percent financing may be heavily advertised, but it can be difficult to qualify for one of these loans. They are typically only offered to buyers who have excellent credit, including a credit score above 700 and a long credit history.

It’s also important to note that not everyone can afford to take out a zero-percent financing loan. Since the lenders are only profiting from the actual sale on these loans, they rarely reduce the sale price of the vehicle or offer any other incentives, such as cash-back rebates.

When is zero-percent financing a good idea?

For buyers who qualify, a zero-percent financing loan may be a way to save on interest payments throughout the life of an auto loan. A buyer can easily save hundreds to thousands of dollars in interest payments over the life of a zero-financing loan.

But it’s crucial that qualifying buyers crunch the numbers to be sure they can easily afford the monthly payments on a zero-interest loan.  

When is zero-percent financing a bad idea?

Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. As mentioned, lenders generally will not bring down the price on a car with a zero-percent financing offer. Buyers may be blinded by the temptation of not paying any interest and consider a vehicle that has a higher monthly price tag than they originally planned.

Loan terms, monthly payments. Another point to consider is the term of the loan. Some no-interest loans feature longer terms than traditional auto loans, as much as six years. Six years is a long time to be paying for a car. On the flip side, many zero-percent financing loans are only four years long, which can significantly increase the monthly payment amount.

No incentives, rebates. Another reason you may want to skip the zero-percent financing and take out a traditional loan – so you don’t miss out on cash-back rebates or incentives which typically are not available on auto loans with special financing offers.

Crunching the numbers

Let’s take a look at the purchase of a single car that’s selling for $20,000 and run it through both kinds of loans.

Scenario 1: Zero-percent financing option, 4-year term. Monthly payments would be $416.

Scenario 2: Traditional auto loan, 5-year term with an annual percentage rate (APR) of 3.45 percent (the average national rate according to data extracted by the NCUA). Monthly payments would be $363.

And, with traditional auto loans, buyers can take advantage of manufacturer rebates. If this car has a $2,500 cash-back rebate, the price would drop to $17,500 – so the monthly payments would only be $318. The total amount paid on the car would $19,080 which would be less than than the amount paid through the no-interest loan.

On a no-interest loan with a five-year loan term (if offered), the difference between scenarios wouldn’t be as dramatic. A zero-interest loan for a five year term on $20,000 would cost the buyer $333 each month, only $15 more than the traditional loan after the rebate.

Calculating your monthly payment

It’s best to run your own numbers through a free auto loan calculator to see what your actual monthly payment would be before taking on a loan. This is the best way to determine if you can afford the payments without overextending your budget.

If you’re ready to get started on your auto loan, contact Arizona Federal Credit Union today to get started. We’ll have you seated behind your new set of wheels in no time!

Your Turn: Have you opted to pass on a zero-percent financing option? Tell us about it in the comments.