If you’re looking at financing a vehicle, you’ve probably already done the math. If so, you know that you can end up spending hundreds, or even thousands, of extra dollars in interest charges over the car’s repayment.
No matter where you get your loan or how long your repayment terms are, the APR you snag really matters. So, how can you save yourself some money and get a zero percent interest car loan?
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Why You Want an Interest-Free Loan
Most cars can be financed at reasonable interest rates. In fact, the average rate on an auto loan in the U.S is only 4.8%–a far cry from average credit card interest rates or even those charged on personal loans. However, even if you’re only talking about a difference of two or three percent, it can still add up over time.
For instance, let’s say that you purchase a new vehicle and decide to finance $25,000 for 60 months. At the average interest rate of 4.8%, you’ll pay a total of $28,170 over the life of the loan–$3,170 in interest charges alone. A 0% auto loan, of course, would have saved you that full amount, which you could have then used to pay off your vehicle early, save up for a new vehicle, or simply pay for gas for a couple years.
If you’re being offered an interest rate between 2-5% on your new or used vehicle, you might be tempted to just accept it. After all, it sounds like such a low rate compared to most other financial products! However, it certainly still adds up over time, especially with such a pricey purchase.
Who Can Get a 0% Auto Loan?
Whether you’re already shopping around for a new vehicle or have simply come across ads on television or radio, you’ll likely hear mention of 0% APR offers. These enticing promotions sound almost too good to be true, but are they?
Interest-free loans are typically offered (and advertised) by the manufacturers themselves. It’s a hook intended to get potential buyers into the showrooms and frankly, it often works. It sounds great, after all: you can drive away in a brand new (or new to you) car, paying it down over a number of years without paying a penny in interest.
Unfortunately, very few people actually qualify for interest-free auto loans when it comes to the application process. A high credit score is required, excluding most car buyers from snagging this enviable rate. In fact, Tony Le of Edmunds.com, says, “Only one out of 10 consumers actually qualifies for 0% and there are many factors that come into play.”
Just how high does your credit score need to be before you can even think about qualifying for a 0% interest auto loan? Well, while there’s no hard-and-fast threshold, Experian Automotive found that the average credit score for 1%-interest-or-less auto borrowers in 2014 was 748.
Lastly, the only people who will typically be able to score a 0% interest auto loan are those who are willing (and able) to take on a lower loan term. If you’re buying a vehicle that requires a 48-, 60-, or even 72-month term in order to comfortably afford the payments, you’re probably not going to get away without any interest. Those interest-free offers are typically reserved for those who can take on a 12-, 24-, or 36-month loan term instead.
Improve Your Odds
If you’re dead-set on a 0% interest auto loan, there are a few things you can do to better your chances. None of them will guarantee that you’ll be able to buy your next vehicle entirely interest-free, but they will help you improve your odds.
The first thing you can do is search for available offers. Browse manufacturers’ current promotions, and even wait until the right one is advertised to begin your car-buying process. By choosing your shopping time frame carefully and working around 0% promotions, you’ll strike when the iron is hot and the offers are available for the taking. (Sometimes, you’ll have the best luck toward the end of the year, when they are clearing the lots for next year’s models!)
You can also get prequalified for an auto loan before you ever step foot on the sales floor. This allows you to not only know what your bank or other lenders believe you qualify for (in terms of interest rate), but it will enable you to begin your negotiations with a little bit more power. If you already have a preapproval for a low interest rate, this could encourage the dealer to make a better offer… whether it be 0% or just slightly above.
If you’re vying for an interest-free loan offer, you should absolutely check your credit beforehand. Your score may be high enough to grant an excellent rate, in which case you can walk into the dealership and demand what you deserve. On the other hand, if your credit score is a bit lower than it needs to be, you can either wait a bit longer to buy (working to build your score in the process) or simply go into negotiations knowing what your score warrants.
Finding a 0% interest auto loan can be difficult, but it’s far from impossible. Picking the right time to begin shopping for your next vehicle, as well as having the right credit score to secure an excellent loan offer, can be the key.
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