If you’ve ever strolled through a car dealership or scrolled through an automaker’s website, you’ve likely seen offers that seem too good to be true: “0% financing for 60 months!” These promotions are hard to ignore, and for many buyers, they can be the final nudge to make the purchase. After all, who doesn’t want to drive off the lot with a brand-new car and no interest on their loan?
But as enticing as 0% financing sounds, there are both advantages and hidden pitfalls to consider. In this article, we’ll break down the pros and cons of 0% financing on new cars to help you determine if it’s truly the best deal for you.
What Is 0% Financing?
0% financing means you can borrow money to buy a new car without paying any interest on the loan. In theory, this sounds like a fantastic deal: you only pay for the car itself, with no extra fees tacked on by the lender. These offers are usually only available through automaker-sponsored financing programs, often provided by a dealership’s financing arm rather than a bank or credit union.
Now, let’s dive into the pros and cons of taking advantage of this seemingly perfect financing option.
The Pros of 0% Financing on New Cars
1. No Interest Charges
The most obvious advantage of 0% financing is that you don’t pay any interest on the loan. Every dollar you pay goes directly toward the principal (the cost of the car). Over the life of a typical auto loan, this can save you hundreds or even thousands of dollars in interest payments. It’s essentially free money from the dealership—if you qualify.
2. Lower Monthly Payments (Potentially)
With no interest to account for, your monthly payments can be lower compared to traditional loans. However, this depends on the length of the loan term and the price of the vehicle. While 0% financing won’t change the overall amount you owe, it can make budgeting easier without the burden of additional interest costs piling up.
3. Fixed Payment Plan
Because 0% financing deals often come with a fixed loan term (e.g., 36 or 60 months), you can rest assured that your payments will stay consistent. This helps with long-term financial planning since you know exactly what you’ll owe each month for the life of the loan.
4. Increased Buying Power
Since you won’t be paying interest, you may be able to afford a more expensive vehicle than you initially thought. For some buyers, this can mean upgrading to a higher trim level or choosing additional features that would otherwise be out of reach with a traditional loan.
5. No Prepayment Penalties
Most 0% financing deals come with no prepayment penalties. This means if you want to pay off the loan early, you can do so without being hit with fees. It gives you the flexibility to clear the debt sooner if your financial situation improves.
The Cons of 0% Financing on New Cars
1. You Must Have Excellent Credit
Here’s the catch: only buyers with excellent credit (typically a score of 720 or above) are eligible for 0% financing. Lenders see 0% financing as a risk, so they only offer it to those they deem very low risk. If your credit score doesn’t make the cut, you may be offered a loan with a higher interest rate—or no loan at all.
Tip: If you’re not sure where your credit stands, it’s worth checking before you head to the dealership. You can get a free credit report from each of the three major credit bureaus once a year at AnnualCreditReport.com.
2. Larger Down Payment Requirements
Even if you qualify for 0% financing, dealerships may require a larger down payment to offset the lack of interest. While this doesn’t directly increase the cost of the loan, it can put a significant dent in your upfront budget. Many buyers are surprised to find out that 0% financing comes with more out-of-pocket expenses at the beginning of the loan term.
3. Shorter Loan Terms
While traditional car loans can stretch up to 72 or even 84 months, 0% financing deals often come with much shorter loan terms—sometimes as little as 36 months. This means that while you’re avoiding interest, your monthly payments may still be higher due to the compressed loan term.
For example, let’s say you’re financing a $30,000 car:
- At 0% for 36 months, your monthly payment would be $833.
- At 3% for 72 months, your monthly payment would be $455.
Although the 0% loan saves you money in the long run, the higher monthly payment may be difficult for some buyers to manage.
4. Fewer Discounts or Cash Rebates
Automakers typically offer either 0% financing or cash rebates as an incentive to buyers—but rarely both. This means that if you opt for the 0% financing deal, you may miss out on a cash rebate that could save you money upfront. Depending on the size of the rebate, it may actually be more beneficial to take the rebate and finance through a bank or credit union with a low-interest loan.
For instance:
- A $2,500 rebate on a $25,000 car would drop your purchase price to $22,500. Financing that with a 3% loan might end up costing less than a 0% loan on the full $25,000.
5. Limited Vehicle Selection
Not all cars are eligible for 0% financing. Typically, automakers offer these deals on specific models or trims they’re looking to move off the lot. If you have your heart set on a particular vehicle, you may find it doesn’t qualify for 0% financing. This could limit your options, especially if you’re looking for something highly specific in terms of features or performance.
6. Higher Loan-to-Value Ratio Risks
When financing at 0%, some buyers are tempted to stretch their budget and buy a more expensive car than they initially planned. This can lead to a higher loan-to-value (LTV) ratio, where you owe more than the car is worth (due to depreciation). If you ever need to sell the car or trade it in before the loan is paid off, you might end up “upside-down,” meaning you owe more than the vehicle’s current value.
How to Decide If 0% Financing Is Right for You
While 0% financing offers can be incredibly enticing, they aren’t the right choice for everyone. To determine if you should take advantage of such an offer, ask yourself the following questions:
- Is my credit score high enough to qualify?
- If not, you’ll likely be offered a loan with a standard interest rate.
- Can I afford the larger down payment and/or shorter loan term?
- Be sure your budget can handle the monthly payments required by a 0% loan.
- Am I missing out on a better deal by passing up a cash rebate?
- Run the numbers with and without the rebate to see which deal benefits you more.
- Is the vehicle I want eligible for 0% financing?
- If not, you may need to reconsider your car choice or explore other loan options.
- Can I comfortably afford the payments for the full loan term?
- Don’t stretch yourself too thin just to take advantage of 0% financing. Be sure the payments fit your financial situation.
Conclusion: The Bottom Line on 0% Financing
0% financing on new cars can be a fantastic deal if you meet the credit requirements, can handle the down payment, and don’t mind a shorter loan term. However, it’s not a one-size-fits-all solution. Before signing on the dotted line, it’s important to weigh the pros and cons and determine if 0% financing aligns with your financial goals and situation. Sometimes, taking a cash rebate or opting for a traditional loan with a low interest rate can actually save you more in the long run.
If you’re in the market for a new car, be sure to compare all of your financing options and work with your lender or dealer to find the best deal for your situation.
