Auto Loans

Is Zero-Percent Financing as Great as it Sounds?

A zero-percent financing loan probably sounds like the best deal you can get when buying a car, but is it too good to be true?

How does zero-percent financing work?

Before we get into whether or not zero-percent financing is the best choice when buying a car, let’s talk about how it works. Zero-percent auto financing is a loan offered by the automaker where you are not required to pay any interest. These are not offered to just anyone – usually, you have to have a credit score above 700, although if you have a good payment history, you could still be approved. It is becoming increasingly difficult to find zero-percent financing loans – these loans are like “free-money” for the buyer, but not for the automaker, who has to foot the tab.

Should you choose the zero-percent financing?

Given you are able to find and qualify for a zero-percent financing auto loan, should you choose this option? It probably sounds like a no-brainer, but there are a few other things you have to consider as the buyer. There are times where automakers offer either bonus cash or a zero-percent financing loan. Usually the bonus cash would be the no-brainer, but when it comes to choosing between the cash and the loan, the bonus cash would have to be quite hefty to offset the interest savings from a zero-percent financing loan.

When is zero-percent financing a good deal?

If you can afford the loan without bonus cash, zero-percent financing is a great deal! When you’ve already done your research, been saving for a while, and have built up a great credit score, a zero-percent financing offer is as close to “free money” as you’re probably ever going to get.

Zero-percent financing is also a great deal when you were planning to buy a car with cash. Using financing instead of paying with cash will allow you to keep that money free for other purchases or emergencies. When you take out and pay on a zero-percent financing loan on time, it adds good points to your credit score, where purchasing a car with cash doesn’t show up on your credit score at all.

When is zero-percent financing a bad idea?

Because zero-percent financing is so close to “free money” it can convince some people who can’t really afford the loan or weren’t really ready to purchase a car to move forward anyway. Often, zero-percent financing loans will have more stipulations than a regular loan – for instance, it many only have a term of 4 years, where a more typical auto loan term is 5 years. This stipulation would make the monthly loan payment higher, which could make it harder to afford than a regular, 5-year loan. Taking advantage of a cash back promotion rather than a zero-percent financing promotion would also make the loan more affordable, given that the loan amount will be smaller, resulting in lower payments.

The exciting prospect of paying no interest on a loan could also propel someone to purchase a car that isn’t exactly what they want or to buy it before they really have enough saved in fear of the offer disappearing.

Ready to go car shopping?

Get pre-approved for an auto loan before going car shopping so you know all your options. Call our lending center at 888-777-9982, apply online, or complete a contact form to learn more. Your perfect car is out there and Patriot wants to help you get it!