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Is 0% car finance really a good option?

Learn more about 0% interest car finance and if it's right for you.

Simplify - Secured Car Loan

Simplify - Secured Car Loan logo

From 6.25% p.a.


  • Borrow up to $500,000
  • Min. loan amount: $5,000
  • Loan term: 1 to 5 years
  • Establishment fee: $100-$500
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When shopping for a new car you may be surprised to see dealerships offering new car loans at a 1% p.a. or even 0% p.a. interest rate. At first glance, this offer is as it appears. You purchase the car at the advertised price and then make monthly repayments on the principal of the car without any interest being applied to it.

However, while it may sound like a good deal, there are a number of things you should be aware of before committing to a 0% loan. Keep reading to find out how 0% car finance actually works and if its right for you.

How does 0% car finance work?

Interest-free car loans are offered by dealerships and typically used as a sales tactic. While you won’t pay any interest on the loan, you may not save money compared to a normal car loan. The dealer will usually charge you a higher price for the car, or add on extra fees which end up costing you more than any interest repayments would.

This is also generally true of dealerships offering 1% finance. The total cost of the loan may be greater than a regular car finance option that charges a higher interest rate.

The 0-1% interest loans tend to be offered for a certain period of time. Afterwards the loan reverts to a higher interest rate. You may also have to make a large lump sum payment at the end of the loan, this called a balloon payment. Balloon payments do lower the size of your repayments but you have to fork out a large lump sum at the end which you have to budget for.

As with any financial product, it’s important that you understand the terms and conditions of 0% car loans, and always read the fine print to discover any hidden costs. Remember, when searching for a car loan, always compare a range of different loans to find the finance option that’s right for you.

Here are the main points to keep in mind:

  • The purchase price of the car may be higher than normal and is usually non-negotiable.
  • You will likely be offered a lower price for any vehicle you want to trade in.
  • The loan structure (term, balloon payment) usually isn’t flexible.
  • You won’t be charged interest for a set period of time.
  • The principal (the amount you borrow) may be lower due to a balloon payment, which will need to be paid at the end of the loan term.

Is 0% or 1% car finance cheaper than a regular car loan?

This depends. A 0-1% car loan won’t necessarily cost less than a normal loan with a higher rate. It may come with additional fees or costs, or charge you a high price for the car.

Interest-free car finance offers will also generally require you to make a balloon payment at the end of the loan term. This reduces the size of your regular repayments but will need to be budgeted for throughout the loan term to ensure you can cover it.

By comparison, standard car loans require you to pay more interest, but the repayments you make will be consistent and your debt should be paid off in full within the loan term. This type of loan structure may make it easier to budget for and give you greater peace of mind.

Alternatives to 0% car finance

Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Establishment Fee
Simplify Secured Car Loan
6.25% - 12.50%
12 - 60 months
$100 - $500
Eligibility: Must be 18+, a New Zealand resident or permanent citizen and have an income of at least $500 per month.
See how much you could borrow without affecting your credit score.
MTF Finance Secured Car Loan
8.70% - 20.70%
3 to 60 months
Eligibility: Must be 18+, be an NZ citizen, resident or have a work visa, and have a regular source of income.
Secured car loans from $2,000.
FROM 6.99%
The Co-operative Bank Unsecured Personal Loan
6.99% - 19.99%
6 months to 5 years
Eligibility: Be 18+, an NZ citizen/permanent resident, or have a valid work visa.
Floating-rate, unsecured personal loans from $3,000.
Kiwi Car Loans Secured Loan
6.95% - 19.95%
1 to 7 years
$195 - $995 depending on lender
Eligibility: Be 18+, an NZ citizen, permanent resident or have a work visa, and have an income of least $500 per week.
100% online secured car loans from $5,000
Lending Crowd Secured Car Loan
5.03% - 15.44%
3 or 5 years
$450 - $1,450 depending on the amount borrowed
Eligibility: Be a NZ resident/citizen and have a good credit score.
Borrow $5,050 to $200,000 for your chosen vehicle. 100% online with no paperwork or early repayment fees.
CarFinance2U Car Loan
8.95% - 23.95%
1 - 5 years
Eligibility: Be at least 21 years old, have a valid NZ driver's licence and be an NZ citizen or permanent resident.
With a CarFinance2U secured or unsecured car loan you could get pre-approval for your next car in 30 minutes.

Compare up to 4 providers

What are the pros and cons of 0% car finance?

When it comes to 0% car finance, a deal may work in your favour depending on its terms and conditions. Consider the pros and cons below when comparing.

  • Added optional extras. When choosing your new car, you may be given the option of added extras, such as alloy wheels, a leather interior or other luxury items. With a 0% car loan you may be able to roll the cost of these into the finance.
  • Capped price servicing. A 0% car loan from a dealership may add dealer servicing into the cost of the loan at a capped price. It’s important to check this fact before signing a contract.
  • Higher loan amounts. Most banks and institutions limit the amount of money they will lend to you for a new car. With a 0% option and a deposit, you may be able to secure a higher loan amount.
  • Inflated cost. The price of the vehicle is almost certainly going to be higher than if you were to buy it with traditional financing. Check this first by searching online for the average price of the car without the 0% p.a. interest.
  • Large deposit. You are most likely going to be required to hand over a significant deposit when you enter into this type of loan agreement.
  • Credit history. Typically, only borrowers with a pristine credit history will be considered for this type of financing.
  • Fees. Some manufacturers hide the cost of interest in monthly maintenance fees. Do the math. In some cases, this will still equal a very low rate loan, so it could still be a good deal.
  • High repayments. The manufacturer wants these types of loans paid off fast and will usually limit your loan term options. This will result in a higher monthly repayment for you.
  • No negotiating. There’s not going to be any negotiating on the price of the car with this type of deal.
  • Trade-in value. Expect the car you use as a trade-in to be drastically undervalued. In this scenario, you are better off taking the loan as is and selling your old car independently to get a fair price.

Before you lock yourself into this type of arrangement, always compare a range of loan products. While paying 0% or 1% interest on your car finance may seem the best option, this isn’t always necessarily the case. You may be able to save money by using a regular car loan.

Picture: Shutterstock

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