The Big Takeaway


Zero percent APR loans are terrific for some, so-so for others, and bad for the rest. Go for it when it’s a good fit; run for the hills when not. When the loan payment fits your budget, and you have already decided to buy a car anyway, it’s great. Otherwise, probably not.


Just remember, a 0% APR loan is like a matador’s red flag waved in front of a bull — an attention-getter to lure you in for the “kill” (sale).


What Is A 0% APR Loan?


When you borrow money, you have to pay it all back plus something extra for the privilege of using the money. That something extra is called “interest.” A 0% APR loan means you only have to pay back what you borrow, nothing extra, no interest.


Sounds Too Good To Be True


Primarily, banks make money by charging interest on loans. When you see offers for 0% loans, typically, the auto manufacturer or their lending affiliate makes the loan, or the dealership pays the interest. Why would they do that?


Unlike a bank, a manufacturer or dealership makes a profit by selling a car. For them, charging “interest” is the icing on the cake. The car…that’s the cake. They want to move inventory.


Don’t forget, when you buy a car, the dealership has an opportunity to sell additional features, a more expensive model, service contracts, and other types of coverage. The dealer wants to get you in the door and will trade-off the interest they could make on a car loan to do that.


Restrictions May Apply


Not everyone qualifies for 0% APR loans.  Typically, only people with stellar credit qualify, so most will not. Why advertise it if most people do not qualify? To get you in the door! Most buyers show up thinking they will get a 0% loan but end up with a loan that charges interest.


The most popular models may be excluded from 0% APR loans. Dealers know that buying a car is an emotional purchase. We buy the car we fall in love with even with less than ideal terms and find a way to rationalize it. Do not think you’re immune. Dealerships count on that!


The most popular loans (for five years or more) may be excluded from 0% APR offers,

forcing you into a much higher monthly payment to get that interest-free loan. The dealership receives more of your money more quickly at the expense of your budget.


That Interest You Are “Saving” May Be Added Into The Price


Sometimes, dealers raise the purchase price before offering a “0”% loan, so they end up making the same amount of profit. It’s just math. Every dealership knows how to play this game if they want to engage in such practices.


Cash Rebate vs. 0% APR Loan


You may have to choose between buying a car with a 0% APR loan with no cash rebate versus receiving a cash rebate and taking a loan that charges interest. If this is the case, you MUST see the numbers both ways. The best choice is often surprising and unexpected!


Below, we assume the 0% APR loan offer applies to 4-year loans only, whereas the Rebate offer charges an interest rate of 4% but allows a 5-year loan. Which offer gives you the lowest monthly payment?


Let’s run the numbers.




Purchase Price: $30,000   Rebate: $2,500   Interest Rate: 4%   Term: 5 years.

Your Monthly Payment:  $506.45




Purchase Price: $30,000   Interest Rate: 0%   Term: 4 years.

Your Monthly Payment:  $625.00


Surprised?  That 0% APR loan may come with an unaffordable monthly payment!


The Bottom Line


First, figure out what you can comfortably afford each month before you start shopping. Then, stick to this amount. Getting an affordable payment matters more than anything else!!!


Second, comparison shop to get a good feel for the average price in your area. Even if one dealer raised the price to offset lost interest from a 0% APR loan, another dealer has not. You have to do your homework.


Third, tell a dealer you will pay cash even if you can’t. They don’t know. Insist on negotiating price, features, everything based on a cash purchase. Make the dealership run the numbers as a cash purchase and put it in writing. Usually, you will see a dealer’s best offer for a cash deal.


Then, after you see the cash-deal offer on paper, say you also want to see the numbers with a 0% loan just for comparison.


Making a dealership calculate the numbers twice annoys the dealer and takes more time (bring snacks), but you will see the real cost of your car. If a dealership says it will take too long, insist they run the numbers. If they won’t, consider walking.


Make a fact-based decision that gives you an affordable monthly payment.


What should you do with all that extra money you pocket each month? Invest it for your retirement.  Your future self will marvel at your wisdom.