Too Good to Be True? What You Need to Know About 0% Financing

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You’ve had your car for years, and you love it, but you know it won’t last much longer. However, you don’t have a ton of money to spend on a new car loan.

In that case, you may want to consider 0% financing. It can be a good option for some, but it’s not always the dream it appears to be.

Read on for information on what to consider before you get your next car loan.

What Is Car Financing?

When it comes to buying a car, financing allows you to get a loan that you pay back over time. You can find car loans with interest rates at or near zero, while other loans have much higher rates.

For some car buyers, 0% financing is the best option. You only have to worry about paying back the amount you borrow to purchase the car.

However, other car loan options can be just as beneficial. Be sure to compare a few loans to determine which one works for your needs and situation.

Pros of 0% Financing

When you look at car deals, you may come across 0% financing. As the name implies, this type of financing has an interest rate of 0%, so you don’t have to pay anything extra when repaying the loan.

Your lending institution will set up the loan and loan terms without interest payments. That way, you can focus on paying down the initial loan amount, which can be less stressful for some borrowers.

Here are a few more detailed advantages of a zero percent interest rate.

Save Money

A loan that doesn’t charge interest will cost you less than a similar loan. Even if the other loan has a low interest rate, such as under three or four percent, the interest can add up.

For example, a $40,000 car would cost you $1,200 with a $0 down payment and a 3% interest rate. You can save money over the lifespan of your vehicle, and that can help you save for yet another new car.

If you like to upgrade cars often, this can come in handy. However, your monthly payment could be just as high if not higher than that of a loan with some interest.

More Predictable

Since you don’t have to calculate interest, you can predict your monthly payments more easily. If you like to follow a budget, you don’t have to worry about the interest putting you over your budget.

Now, your car payment should stay the same even if your loan charges interest. However, you’d need to calculate the interest and the principal loan balance when figuring out how much you’ll owe each month.

A loan with 0% financing can help simplify that process. That way, you can estimate your monthly expenses and prepare for them before you sign for the loan.

Faster to Pay Off

Having to pay interest can slow down how quickly you repay a loan. If your interest rate is 0%, you can repay the total balance much sooner than you would otherwise.

That can help you become debt-free, which can be very fulfilling. Even if your goal isn’t to be debt-free, paying the loan off sooner can take the stress of the loan off your shoulders.

Of course, you may have higher monthly payments to pay off the loan in less time. However, that can be worth it, especially if you want to save money for other loans or expenses, such as buying a house.

Cons of 0% Financing

As good as it sounds, 0% financing isn’t always the perfect option. Plenty of car loans have low interest rates that can work out just as well as long as you don’t miss a payment.

Before you take out this type of car loan, consider the drawbacks, like higher monthly payments. Sometimes, paying a bit in interest is worth it to save money each month.

Consider the following disadvantages that come with 0% car financing.

Fewer Options

When you look for 0% financing, you may notice you can’t buy just any car at 0%. In general, 0% financing is only available on new vehicles, so you can’t buy a used car this way.

Maybe you’re okay with getting a new model, but you have a specific model in mind. Not all makes and models will qualify for a 0% interest loan, so you might need to compromise on the car you purchase.

Before you buy a car, ask if the one you want would qualify for financing at 0%. If not, you have to choose if you want the lower interest rate or if you’d prefer your dream car.

Requires a High Credit Score

Some car loans are available to most borrowers, and you don’t always need a high credit score. However, you may need an excellent credit score for a lender to approve you for 0% financing.

If you have great credit, this won’t be a problem. The average Canadian has a credit score between 650 and 725, but your credit score could be as high as 900.

Even the average borrower might not have a high enough credit score for a loan with 0% interest. Unless you have fantastic credit, you might not qualify for the loan you want.

Restrictive Terms

Some 0% financing car loans come with more restrictive terms. A common example of this is that the loan term is relatively short, which will increase your monthly payments.

In a few cases, the 0% interest rate will go away after a year or so. For the rest of the term, you may still need to pay some percentage of the loan in interest.

Also, the loan may not always be available at 0%, so you may feel tempted to buy a car sooner than when you’re ready. Finally, you may need to pay a hefty downpayment on the loan, especially if you want to keep your monthly payments from being too high.

Is 0% Financing Always Best?

Even if you don’t mind the potential restrictions, 0% financing isn’t always ideal. A popular alternative is a cash rebate for a set amount of money.

You’ll have to pay interest on the loan with the rebate, but the cost of the car will be lower. Depending on the loan amount, you might save more by paying interest and taking the rebate.

Consider a $40,000 vehicle with no rebate and no interest, so you’d pay $40,000 overall. Now, you might qualify for a $5,000 rebate, and you’ll get a loan with a 4% interest rate and a term of 60 months.

You’d owe $3,675 in interest, so you’d pay $38,675. That means you’d save $1,325 compared to the 0% financing option.

How to Get the Best Deal on a Car

Whether you go for 0% financing or not, you should look for the best deal on your next car. You can do a lot of things to save money upfront or on the total cost.

As you look at car deals, you should review the following options. Then, you can increase your chances of saving money and also getting the vehicle of your dreams.

Look at Used Models

Used models may or may not qualify for 0% financing, but they can still be the better option. A used car usually costs less than a comparable new vehicle.

You don’t even have to buy a car that’s multiple years old. Some people trade in vehicles after a year or two, so they’re in like-new condition and may not have a ton of miles on them.

But the car dealership might list that used car for significantly less than the newer version of the model. If you’re willing to go with a used car, you could save a ton of money.

Of course, you’ll want to test the car and make sure nothing needs repairs. However, if the car is in working order, you can negotiate a lower price.

Get Pre-Approved

Another excellent thing to do is to get pre-approved for a car loan. Do this before you start shopping so that you can learn what loan terms you’d qualify for based on your credit.

You’ll learn if you can get 0% financing at all. If not, the pre-approval process can show you how low of an interest rate you can get to help save money on your purchase.

Pre-approval can also help speed up the purchasing process when you’re ready to buy a car. You won’t have to wait for the dealer to run your credit and give you your options.

Knowing what you qualify for ahead of time can help you narrow your options for vehicles. Then, you can look at ones with the best deals for you.

Improve Your Credit

If you don’t qualify for the deals you want, consider holding out before you buy a car. Work on improving your credit score so that you can get a lower interest rate.

Pay off any other loans you have, such as for an existing vehicle. Be sure to at least make the minimum payments each month for loans you can’t pay off, like a mortgage.

It can take a while to improve your credit score, but it can be worth it. You might be able to lower your interest rate significantly to help cut costs when buying a car.

Of course, this isn’t the best strategy if you need a new car right away. However, if you can wait, do so as you work on your credit and apply again in a few months.

Wait for Sales

Another option that requires a bit of patience is to look for special deals and sales on vehicles. Many dealers will lower their prices at certain times when sales tend to slow down or they need to meet their sales quotas.

When it comes to slower sales seasons, weekdays tend to be good days to find lower car prices. If you can take off from work, look at cars on a Wednesday to see if you can get a better deal than on the weekend.

You might want to shop outside the normal season for the vehicle you want. For example, you could buy a convertible in the fall since most people aren’t buying those vehicles at that time.

Car dealers also may drop prices near the end of the month or year to meet their quotas or to move old inventory. Keep all of that in mind when deciding when to go shopping for a car.

Shop Around

You may want to look at multiple car models from the same dealer. If you know what model you want, look for it at a few dealers in your area.

Either way, test drive as many cars as you can to get a feel for them. Then, you can get an idea of what’s out there and what deals are available at the time.

Once you find a car you like, ask the dealer if you can get a loan and what the interest rate might be. Look for the same car at another dealer and ask about their loan options.

That way, you can get the best possible loan and get the car you want. Alternatively, you could look at various cars at the same dealer and buy the one with the best loan.

Grab Your Calculator

Before you decide which loan to get, consider using a loan calculator. You can input the total cost of the car, a down payment, the term, and the interest rate.

Do this for all of the cars you’re considering to get an idea of your monthly cost and total cost. That will help you determine which car will be the most affordable.

If you can’t afford any of the options, you can keep looking. You could also ask for a longer loan term to decrease your monthly payments.

Of course, you can also hold off on buying a car while you work on your credit. If you can raise your credit score, you should be able to get a lower interest rate to help decrease your costs.

Will You Buy a Car With 0% Financing?

A car loan with 0% financing sounds like the best thing in the world. However, you have to meet certain requirements, and you may not be able to buy the exact car you want.

Also, if your other option is getting a rebate, the rebate could save you money, even after accounting for interest. Keep all of that in mind when selecting the right car loan for you.

Are you ready to shop for a car? Fill out our application to get approved for a loan today.

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