The truth about zero-interest car loan offers

Often with zero-interest loans, borrowers are often required to pay back a loan in a much shorter term like 36 months.  

Here’s how that breaks down: 

If your loan for a $40,000 car is 72 months at an annual percentage rate (APR) of 5.49% with a down payment of $2,500, you would pay around $655 per month.*

If you paid that same loan back over three years instead at 0% APR, you would pay $1,115 per month.* 

 

That is a significant difference for anyone’s budget. Experts say your car-related expenses shouldn't be greater than 20 percent of your monthly take-home pay. So to afford a $1,000 car payment, your income after taxes would need to be at least $5,000 per month. 

Explore the options for your own situation using this auto loan calculator.

2. To avoid a higher monthly payment, you will need to put down more money up front. If a zero-interest auto loan requires you to accept a short term with a much higher monthly payment, making a bigger down payment can help lower your monthly payment. But saving up enough for that down payment can be a struggle. And if you haven’t saved enough for the down payment, you may not be able to take advantage of a 0 percent offer with a shorter term.  

3. You may not qualify. Often, a zero-interest offer from a dealer will require you to have a very good or excellent credit score (at least 740+ in some). This will exclude buyers who fall under the national average of around 700. 

4. If you do qualify, there may be hidden expenses and terms. Make sure you read the fine print to fully understand what you are getting yourself into. Signing a zero-interest loan deal may eliminate you from participation cash-back and other incentives that could potentially lower the overall amount you pay on other loan options. 

Savvy loan shoppers always look at the following details in a loan agreement before signing: 

Also, beware of terms addressing late payments. For example, does the interest rate increase if you miss a payment or two? Make sure you know the answer. 

5. You may pay more for your car with a zero-interest loan. Make sure you negotiate to get the best price for your car. When you are being offered a zero-interest loan, the dealer will have more leverage on the price of your car, often placing add-ons into your deal and pressuring you into an expensive protection/warranty plan. Again, always carefully review anything you sign. Don’t be afraid to question anything in the deal that seems off. 

When exploring a zero-interest loan, make sure the offer applies to the specific car model you want to buy. Sometimes zero-financing offers are used as a “bait and switch” technique to get shoppers through the door only to find out that the deal doesn’t apply to every car model. The selection of vehicles is at the choosing of the manufacturer, who typically uses a zero-interest offer as an opportunity to move overstock.  

If you know you’ll be in the market soon for a new or used vehicle and want to be prepared when you go the dealer, take the time to shop around not only for the best price on a car but for the best loan rates. 

If you are already a member of a credit union like CAFCU, find out if your credit union has any loan specials and compare their rates against those of other lenders.  

Once you’ve settled on the best option, apply for preapproval on an auto loan before you go to the dealership. That way, you have options when faced with an offer from a dealer that might not work with your budget.  

The preapproval process is typically fast and empowers you to start car shopping faster. CAFCU’s Lending Center, for example, can approve a car loan within one business day so you can start your search. 

 

With credit unions like CAFCU, you can apply online and, if everything checks out, receive a preapproval letter by email that you can take to your dealer. This letter will advise the dealer on the amount of loan you are approved for. You’ll also get a checklist of items your lender will need to approve the loan so the dealer can get the cash to cover your car purchase.  

 

When you’ve found the car you want, your dealer will share the purchase order with your lender, along with any other required documents so the lender can make their final approval and cut a check to the dealer. 

Did you already get pressured into dealer financing? 

If you are stuck with an oppressive monthly payment due to zero-interest financing, it’s not too late to get help. You may be able to refinance your loan with another lender to lower your monthly payment with a longer term.