0% APR car deals: is there a catch? (2022) – MarketWatch

If you’ve seen advertisements for 0% APR car deals, you might have thought they’re too good to be true. Interest is how lenders make money, so how is it possible that they don’t charge interest on a loan? The answer is that lenders get that money back in other ways.

We at the Home Media reviews team uncover the truth about zero-interest financing deals. Our team researched which lenders offer these rates, how they do it and whether getting a 0% APR car deal makes financial sense. We’ve also reviewed the providers with best auto loan rates and best auto refinance rates of 2022 to help you find a lender that’s right for you.

What does 0% APR mean?

The annual percentage rate (APR) is the yearly interest charged on a loan, plus any fees. When a lender or dealership offers a 0% APR car deal, it means that you’ll pay no interest over the life of the loan. 

APR vs. interest rate

You may see the terms “APR” and “interest rate” used interchangeably, but they’re not the same. While the interest rate is what you’re charged for the money you borrow, the APR is that rate plus other costs and fees that come with the loan. That’s why the APR you see is often higher than the interest rate.

What is the average auto loan interest rate?

The average auto loan interest rate is 3.86% for new cars and 8.21% for used cars, according to Experian’s Q4 2021 State of the Auto Finance Market report. However, these rates won’t necessarily give you a clear picture of what you might pay for a car loan.

This is because rates are based on a number of factors about you and your vehicle, including the items below:

  • Credit score
  • Credit history
  • Loan term
  • Income
  • Required monthly debt payments
  • Down payment/trade-in value
  • Vehicle purchase price
  • Vehicle value

Average car loan interest rates by credit score

Of all the factors that contribute to your interest rate, your credit score is the most influential. Depending on your credit score, you fall into one of several categories of borrowers, sometimes known as credit bands.

While other factors will cause your rates to vary, this table shows the average auto loan interest rate by credit score, according to data from Experian:

How do 0% APR car deals work?

At first glance, 0% APR car deals might seem like getting something for nothing. But it’s not actually that simple. While lenders still make profits on these deals, how they make that money is different.

In most cases, a 0% APR car deal comes from the automaker’s finance company, such as Chrysler Capital or Hyundai Motor Finance. To make up for not earning interest on the loan, the manufacturer may offer the vehicle at a higher price or try to sell add-ons such as extended car warranties. The interest-free loan is meant to make shoppers more inclined to buy a vehicle and these extras.

Is there a catch to 0% APR car deals?

There isn’t necessarily a catch to 0% APR financing offers. These deals are real, and you won’t pay any interest on your car loan. However, that doesn’t mean they’re the best deal for you. Even without interest payments, you could still pay more overall.

That’s because taking a 0% financing deal will usually make you ineligible for manufacturer rebates offered on new cars. You may have heard these incentives referred to as “bonus cash” or “cash back” in commercials.

A rebate may be more than what you’d pay in interest on a typical loan, especially since new car loans generally have the lowest interest rates. Reading all offer disclosures and using an auto loan calculator can help you determine whether you’d save more money with a rebate or 0% financing.

Downsides of 0% APR car deals

As appealing as 0% APR car deals might sound, they do have downsides.

  • Shorter loan terms: You may find 0% APR car deals with 72- or 84-month loan terms, but they’re rare. Usually, these offers come with shorter terms, such as 48 months. That can mean higher monthly payments.
  • No rebate: In most cases, taking a 0% APR car deal means you can’t access the rebates sometimes offered by manufacturers and car dealers. A rebate may be worth more than what you’d pay in interest if you’re eligible for the best auto loan rates.
  • Limited selection: Car dealerships typically only offer zero-interest financing on new vehicles or lightly used ones. And in many cases, they’re only available on certain models. If you’re after a 0% APR car deal, you may not have as many choices of cars to buy.

How to qualify for 0% APR car deals

Not everyone will have the option to take a 0% APR car loan. These deals are generally only offered to buyers who fit specific criteria.

  • Good credit: You’ll likely need a good or excellent credit score to qualify for a 0% APR car deal.
  • Large down payment: You can find no-money-down, 0% interest auto loans. However, it’s much more common for these loans to require a sizable down payment.
  • Low debt-to-income (DTI) ratio: Your DTI is the ratio of how much you owe for debts each month compared to your monthly income. The lower that ratio, the more likely you are to be approved for zero-interest financing.
  • Stable income: It’s important to lenders that your income be dependable. Being able to show a reliable income through employment or other means will help you qualify for a 0% APR car deal.

Bottom line on 0% APR car deals

Whether you should take a 0% APR car deal for your next auto purchase comes down to which option will save you the most money based on your needs. Thankfully, there are tools available to help you figure out the best move for you.

If you’re looking at a particular make and model, such as a certain SUV or pickup truck, check whether the manufacturer offers a rebate. You can search online to find the amount of the rebate. Then, use an auto loan calculator to see how much you would likely pay in interest with a different loan.

Once you know how much you would pay in interest, you can compare that amount to the rebate. Knowing how much you will — or won’t — save by taking a 0% APR car deal instead of a rebate can help you decide which financing option is right for you.

Top recommendations for auto loan providers

Even if you think a 0% APR car deal is the best option for your next car purchase, it’s worth considering other options. After all, there’s more to financing than just the APR. Applying for multiple auto loans within 45 days won’t impact your FICO credit score any more than applying for just one in that time, and shopping around can help you compare offers. We recommend starting your search with these providers.

myAutoloan: Most Popular Marketplace

As an auto financing marketplace, myAutoloan gives you the chance to get multiple loan offers all in one place. Once you enter your information on the website, you’ll start receiving offers from lenders. Borrowers might find this approach easier than applying with each lender individually. In addition, myAutoloan is open to borrowers with a minimum credit score of 575, making it an option for a wider range of people than many other providers.

Auto Credit Express: Good Option for Bad Credit

Auto Credit Express works with dealerships to provide financing options for people of all financial situations, but the company specializes in bad credit car loans. It claims to have the largest selection of bad credit car dealers in the U.S., and even people with poor credit or a previous bankruptcy can find financing through the provider. Borrowers with pristine credit might find better deals elsewhere, but if your credit history is less than stellar, Auto Credit Express is certainly worth a look.

Our methodology

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

  • Reputation (25% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
  • Rates (25% of total score): Auto loan providers with low APRs and high loan amounts scored highest in this category.
  • Availability (25% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
  • Customer Experience (25% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness, friendliness and helpfulness of each warranty company’s customer service team based on our shopper analysis.

*Data accurate at time of publication.

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