Auto Loans

0% APR Car Deals in 2020: What’s the Catch?

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% APR car 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.

If you’re wondering whether to jump on a 0% car deal during the COVID-19 pandemic, keep reading to see if it’s a good fit for you.

What does 0% APR mean?

Before you consider 0% APR car deals, it’s important to understand what APR means. When you borrow money, you typically must repay the lender plus interest. An interest rate is the percentage of the principal that the lender will charge you. An annual percentage rate, or APR, is that yearly rate plus lender fees (not dealer fees). Part of your monthly car payment will go toward paying the lender and part will go toward your loan.

A 0% APR deal means that you can borrow money for free and 100% of every payment you make is applied to your loan.

Current 0% APR car deals

Automakers are offering 0% APR car deals during the pandemic for as long as 72 months. Keep in mind that these deals are limited to the select models that the manufacturer chooses and can vary by location. Expiration dates also vary, so check manufacturer websites for the most up-to-date information.

Acura is offering 0.9% financing for 24 to 72 months and 90-day payment deferrals that buyers may be able to combine. See current offers here.
Buick is offering incentives such as rebates and discounts for first responders and health care professionals. See current offers here.
Cadillac is offering 0% financing for 60 months plus cash rebates and discounts for first responders and health care professionals. Cadillac buyers may be able to combine APR deals and available rebates.
Chevrolet is offering rebates such as Customer Cash and discounts for first responders and health care professionals.
Dodge is offering 0% financing for up to 72 months, 90-day deferred payments, $500 First Responder Bonus Cash and rebates. Dodge buyers may have to choose between APR offers and full rebates.
Ford is offering 0% financing for 72 months, rebates and a $500 discount for first responders and health care professionals. Ford buyers may have to choose between special financing and some or all available rebates.
GMC is offering Customer Cash and discounts for first responders and health care professionals. See current offers here.
Honda is offering 0.9% financing for 24 to 60 months and 1.9% financing for 61 to 72 months. See current offers here.
Hyundai is offering 0% financing for up to 72 months, plus a 90-day payment deferral and some rebates. A $500 rebate for first responders and health care professionals may be available. Hyundai buyers may have to choose between APR offers and other incentives.
Infiniti is offering 0% financing for up to 72 months. See current offers here.
Jeep is offering 0% financing for 72 months and cash allowances. A $500 rebate for first responders may also be available.
Kia is offering 0% financing for 60-66 months, 0.9% financing for up to 60 months and cash rebates. Kia customers may have to choose between rebates and financing offers.
Lexus is offering 0% financing for up to 60 months plus a 90-day payment deferral. See current offers here.
Lincoln is offering 0% financing for 72 months and cash rebates.
Mazda is offering 0% financing for up to 60 months plus a 90-day payment deferral. Mazda buyers may be able to combine 0% APR deals with customer cash incentives.
Mitsubishi is offering 0% financing for 72 months, plus cash rebates. Mitsubishi customers may have to choose between 0% financing and a larger cash rebate.
Nissan is offering 0% financing for up to 72 months, which buyers could combine with select cash rebates. See current offers here.
Subaru is offering 0% financing for 63 months. Subaru customers may be eligible for a 90-day payment deferral.
Toyota is offering 0% financing for up to 72 months. Cash rebates may be available instead — see current offers here.
Volkswagen is offering 0% financing for up to 72 months on new vehicles. Volkswagen customers may also find 0% financing for 36 months on select certified pre-owned models.

Payment deferrals

Deferral means you’re postponing payments, not skipping them altogether. You will still have to make those payments, just at a later date, during which time interest will continue to accrue.

Why would an auto dealer offer 0% APR?

Short answer: It’s a way to sell more new cars. The lenders that offer 0% APRs are linked to auto manufacturers, and these “captive” lenders can offer loans with no interest because the company as a whole makes a profit from the car sale. For example, Toyota’s 0% financing deals are offered by Toyota Financial Services, or one of its financing arms, only on Toyota vehicles.

APR deals also serve as a way to get customers in the door. Even if a customer may not qualify for the 0% APR, you may still obtain a low interest rate with the captive lender. But it may feel like a bait and switch if you pick out a car, test drive it and negotiate a price only to find out you don’t qualify because your credit isn’t quite good enough.

Get preapproved: This is why it’s ultra-important to review 0% car deals closely and get preapproved for an auto loan before you go to the dealership. A preapproved auto loan offer will not provide you with a 0% APR in all likelihood, but it can give you an idea if you’re eligible for the lowest rates and let you know how lenders see your financial health. And this way, if you’re not approved for a 0% APR at the dealership, you still have your preapproval offer to fall back on.

What to watch out for

If you do qualify for the 0% APR loan, keep in mind that dealers will still aim to make money by selling 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. If the dealer says add-ons are required for the 0% financing, ask to see the policy in writing.

Likelihood of qualifying for 0% APR car deals

The lower your credit score, the lower your chances of qualifying for a 0% APR car loan.

According to Experian, you’re looking at a score above 740 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, as well as different versions of your credit score, including your 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.

What else your lender looks for

Two other factors are important in how a lender determines whether you qualify for a 0% APR loan. The first is your debt-to-income (DTI) ratio, which helps a lender judge your ability to repay your car loan. You may learn more about DTI, including what a good DTI is and how to calculate it. The second is your loan-to-value (LTV) ratio. A loan is considered riskier if the borrowed amount is higher than what the collateral is worth. So if you have negative equity from a trade-in, you may want to consider making a down payment.

Is there a catch?

Strong credit is required, as we’ve mentioned, but you also won’t find 0% APRs on just any car on the lot. Here are some of the limits of 0% APR financing:

  • New cars only. It’s worth noting, however, that you can find near-zero APR deals on certified pre-owned (CPO) vehicles.
  • Limited choice. Automakers offer the best deals on the models that they want to sell quickly based on supply and demand. You may be able to obtain 0% APR on one model but not another, depending on when you go car shopping. Tell your salesperson that you only want to look at cars that are available for the 0% APR financing program.
  • Shorter loan terms. The dealer may be offering 0% APR on a 48-month loan, but a 1% APR on a 72-month loan. In general, you may have to choose a relatively short term for the best deal. Deals during the COVID-19 pandemic are an exception, with manufacturers offering 0% financing for longer.

Zero-percent financing vs. cash rebates

If you feel like you’ve negotiated a good price on the vehicle you want to buy, as well as your trade-in, and you qualify for the 0% APR car deal, then there may be nothing wrong with taking the deal. 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.

If you must choose between a 0% financing offer and a rebate, it is almost always better to take the rebate, especially if you don’t plan to keep the car for the full length of the loan term.

It really comes down to the math, according to Greg Bohrmann, board member of the AAA Fair Credit Foundation, who provided this example.

What’s Better: 0% Financing or a Cash Rebate?
Zero interest Cash rebate
Vehicle price $32,000 $32,000
Down payment $2,000 $2,000
APR 0% 4%
Rebate $0 $2,000
Payment $500/month for 60 months $516/month for 60 months
Amount owed after 3 years $12,000 $11,399

 

If you focus on monthly payment, it looks like the better deal is the 0% APR. But if you look at the bottom line after three years into the five-year loan, the rebate is the better deal. Ultimately, your choice will depend on what’s important to you.

Double dip: But there could be a way to have your cake and eat it, too — double dipping is when you take the rebate in exchange for the higher APR, but after a month or so, turn around and refinance it at a lower APR from another lender, such as a credit union. Learn how to get the lowest auto refinance rates.

When a 0% APR deal isn’t worth it

A 0% deal may not be worth it if it’s not available on the car you want or, as shown above, you can get a better deal by taking the rebate and/or double dipping. But there are other cases in which it may not be the best choice.

When a new car isn’t in your budget 

Zero-percent deals are only offered on new cars. According to Edmunds, new cars lose about 20% of their value in the first year of ownership and up to 60% of their value in the first five years, so a used car is almost always going to be less expensive to buy. See more on whether to buy a new or used car.

A middle ground could be a CPO vehicle. Cheaper than new (but more expensive than other types of used cars), CPOs sometimes come with near-zero APR deals, as we mentioned earlier. However, these offers may not be as plentiful as new-car deals.

When the cost of ownership doesn’t fit your monthly budget

Besides the car payment, you probably need to cover auto insurance, fuel, maintenance and possibly parking passes if you need to park in a city. How much a car costs is higher than its sticker price, and it’s best to be sure that you can comfortably afford it.

 

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