Auto Loans

0% APR Car Deals: Is There a Catch?

how to lower car payment

If you’re in the market for a new car, chances are you’ve seen dealership advertisements for 0% APR. You may be wondering what this means and if it’s too good to be true — and you’d be right to question it. Always read the fine print to determine what the real deal is. There are some situations where a 0% offer may be a good deal, and we’re going to talk about those, as well as some cases where the deal might not be as sweet as it seems on paper.

What does 0% APR mean?

Before you consider 0% APR car deals, it’s important to understand what they mean.

When you borrow money from a bank or lending institution, you typically must pay a fee. This is called interest, and the annual percentage rate (APR) that you receive determines what fee you will pay over the life of the loan. This fee, which includes the interest and costs that make up your loan, is factored into your monthly loan payment.  When you have an APR, part of your payment will go toward paying off your fee and part will go toward your loan.

A 0% APR deal means that you can borrow money without a fee, and 100% of every payment you make is applied to your loan. Essentially, you are paying the same amount over time as a buyer who purchased the vehicle with a single lump-sum cash payment.

Zero-percent APR deals rarely last forever, which is why you might see words like “introductory” or “promotional” before a 0% APR advertisement. This is a signal to you that this deal will end eventually, so be sure to check the fine print for details.

Why would an auto dealer offer 0% APR?

Have you ever heard of a bait and switch? Unfortunately, that’s what dealers are often doing with 0% APR car deals.

“0% loans can be a real trap with fine print,” said Ken Benner,  head of the American Council on Consumer Awareness, Inc.

The advertisement is meant to get you in the door, but once you’re in, you may find out either a) you may not qualify for the deal, or b) that salesman may try to sell you on a different deal altogether — one that doesn’t include a 0% APR deal.

Often, 0% APR deals are offered through an advertisement that states “on approved credit.”  If you don’t review 0% APR car deals closely before heading to the dealer, you might not realize you don’t qualify till you’ve already picked out a car, test driven it and negotiated the price. When it comes time to finance the car, you find out you don’t qualify because your credit isn’t quite good enough.

In this situation, the dealer will offer you other financing at a higher rate. This is why it’s ultra important to shop for auto loans and get pre-approved before you go to the dealership. At least then you’ll know realistically what rates you qualify for, and you can negotiate.

Keep in mind, even if a deal does offer a financing deal at 0%, the dealer is still making money on the sale of the car or add-ons, such as extended warranties or gap insurance. And this becomes one of the major ways they can take you for a ride. Make sure you negotiate the actual price of the vehicle as well as add-ons, and don’t just take the first deal offered.

Likelihood of qualifying for 0% APR car deals

Your chance of qualifying for a 0% APR car loan goes way down the lower your credit score is, says Benner.

“After over 20 years of research, I have yet to find anyone with a ‘perfect’ credit score,” he added.

What type of score do you need to qualify for a 0% APR deal? The answer is it varies.

According to Experian, you’re looking at a score above 780 to qualify for the top financing rates for new cars. However, you may be able to qualify with a lower score, because lenders are considering your entire credit history, including your credit score, FICO score and FICO auto score. Lenders will also look at the types of accounts you have opened, when you opened them, the credit limit or loan amount, the account balance and your payment history

To improve your chance of qualifying, you’ll want to make sure you have a strong credit history and credit score.

This means:

  • Paying your bills on time.
  • Having different types of loan accounts on your credit report.
  • Having a long history of successful credit.
  • Keeping credit card balances low.

If you’re just starting out, here are some additional tips on improving your credit score. But if your credit is already good, here’s how to take it to excellent.

Does my debt-to-income (DTI) ratio matter?

While dealers may look at your DTI, the standard use for most automobile loan underwriting is a payment-to-income (PTI) measurement. This is the amount of your car payment plus insurance compared with your gross monthly income. Each lender has its own threshold for DTI and PTI and will adjust interest rates according to those thresholds.

You may learn more about DTI in this article, including what a good DTI is and learn how to calculate your DTI here.

Is there a catch?

Dealers offering 0% finance will in some cases either charge fees or raise the sale price to cover the financing offered.

The good news is it’s easy to figure out when a dealer is doing this. All you have to do is talk to the lender providing the financing and request what charges above the sale price are being added.

“Here in Arizona, a typical $400 ‘DOC’ fee is charged to file an ownership from dealer to buyer,”

said Benner. DOC, short for document fees, are what the dealer charges to do the paperwork for your vehicle purchase. Benner suggests finding out if a similar purchase price can be arranged with another dealer, but without the fine print fees.

Another way dealerships can trick you with low advertised APRs is that it may only apply to loans up to a certain amount. If you purchase a car for more than that amount, you won’t receive the 0% APR on the remainder of the loan.

If you see an advertisement for a 0% offer where the fine prints limits how much can be financed at that rate, you’re looking at deceptive advertising, and you may want to stay away.

When to take the deal

If you feel like you’ve negotiated a good price on the vehicle, and your credit is good enough to qualify for the 0% APR car deal, then there may be nothing wrong with taking the deal. It really comes down to the math.

If there are other incentives offered as a secondary option to your 0% financing rate, then the choice may be a little harder. In most cases, the dealer may offer you a rebate incentive in place of the 0% APR offer.

“When you ask yourself, do I want to take a $2,000 rebate or 0% financing, do the math for yourself,” said Greg Behrmann, board member of AAA Fair Credit Foundation. Although, according to him, few consumers do, so he provides an example.

On an average transaction of $32,000, let’s say you have a $2,000 down payment. If you take the 0% offer, your payment is $500 for 60 months. But if you take the $2,000 rebate, and you qualify for 4%, your payment with the rebate is $515.

“If you’re payment conscious, the better deal is $500 for 60 months,” stated Behrmann.

“But let’s say you get itchy and want to trade your car every three years,” Behrmann said with another example. On the same car, with a $2,000 down payment, you’re looking at $30,000 today versus $28,000 if you take the rebate.

So what’s your payoff in three years? Twelve thousand dollars on the 0% offer and $11,399 at 4% interest with the rebate. So in this case, the payoff is better after three years with the rebate.

Clearly, your decision will depend on what’s important to you.

When it’s not worth it

A 0% deal may not be worth it if there are catches or limitations on the offer. Here are some questions you might ask the dealership about their advertised 0% rate. If the dealership answers unfavorably to any of these questions, you may want to consider a different deal.

  • Loan term. Does the 0% APR apply to loans for only a short term? And what is your APR once the deal expires? If the term required doesn’t meet your needs or makes your payment too high for your budget, you may need to pass on the deal.
  • Amount. Is the APR limited to a certain amount? For example, $12,000. If so, ask what the financing terms are for larger loans. If it’s not a competitive rate, you may want to walk away.
  • Additional purchases required. Do you need to purchase an extended warranty or other add-ons to be eligible for the rate? If so, and you don’t want those add-ons, the price of the extra costs probably makes the financing offer a bad deal.
  • Vehicle price. Determine if you will be charged a higher vehicle price. For example, you may ask, “What is the price if I paid cash?” If you can’t negotiate a good price on the car, walk away from the deal. The dealer is probably trying to compensate for the APR offer with a higher car price.

Compare Auto Loan Offers