- What is 0 percent financing? A person's credit history, the government's current financing rates, market conditions and special offers by the dealership are compiled to calculate an annual percentage rate (APR). The better the credit, the lower the APR. Zero percent financing, or 0 APR, means that no interest needs to be paid on top of your principal payment each month on your car loan due to the low risk of your loan defaulting. The 0 percent financing may be combined with a zero down payment, zero payments for X number of months or a rebate offer.
- After the auto dealer has come back to the bargaining table from his "Let me ask my supervisor what kind of a deal I can give you" line, he will likely offer the choice of a rebate or 0 percent financing. Take a moment to do the math here. Often the manufacturer's suggested retail price (MSRP) is inflated by a few thousand dollars to give the auto dealer negotiation room for either choice, and the rebate will be a better deal because it gives you a couple thousand dollars to apply to your down payment, leaving you less likely that you must finance. The terms of a 0 percent financing offer may also require a larger down payment, and don't forget about the tax, tag and license fees, which are usually over $1,000.
- Your car payments will be monthly, and you will often be given the choice of term lengths---usually 3, 4 or 5 years. A 0 percent financing agreement is usually limited to the 3-year (36-month) option. Having to pay a higher monthly payment due to the payoff of principal in a shorter amount of time versus a 4- or 5-year term may discourage buyers from taking the 0 percent option. The 0 percent deal is primarily just a tactic to bring you into the dealership, since only a percentage of potential buyers qualify. The shorter loan time also gets money into the hands of the dealership faster.
- Even though you may see a 0 percent financing deal advertised by an auto dealership, you may not be able to take advantage of it. Typically, the minimum credit score the auto dealership will accept for 0 percent financing is a 700 score. However, in dire market conditions, dealerships may relax that standard to as low as 620. Dealerships will assign incrementally higher APRs for buyers with less-than-prime credit scores. Check your credit scores with Experian, Equifax and TransUnion before you enter the dealership.
- Before you walk into the dealership, make sure you know what you can afford. It is easy to be wooed by the new car smell, hypnotized by the stripes of a shifty car salesman's suit and forgetful when it comes time to evaluate the 0 percent financing versus other options. Is the dealer massaging the numbers of the total cost of the car to work with your 0 percent financing? If you are inexperienced with these kinds of transactions, bring a friend with you to help make sense of the deal.
