Is a 0% car loan really a good option?

When shopping for a new car, you’ll come across dealers advertising car loans with an extremely low interest rate — sometimes even 0%. This type of dealership loan is generally a sales tactic.

Before signing on the dotted line and driving off the forecourt, there are some things you need to know about taking on a 0% car loan.

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What’s the catch with a 0% car loan?

At first glance, a 0% car loan is exactly as it appears, you purchase the car at the agreed price, and then make monthly payments on the price of the car with no interest. However, keep these points in mind:

Why would a dealership offer a 0% car loan?

There are different reasons why dealerships offer zero interest. One reason is to get potential buyers in the door. Once a buyer has entered into a salesperson’s territory, the sales battle has begun.

Another reason is to move inventory. By offering a 0% car loan, they can get rid of the cars that have been on the forecourt too long, and make a profit — even without interest.

Is a 0% car loan cheaper than a regular car loan?

If you make all of your payments on time and get a competitive price on the car, it can be. However, 0% car loans tend to have shorter terms, resulting in higher monthly payments of a few hundred pounds.

But if you’ve been approved for a 0% car loan from a dealership, odds are good you have great credit. You’ll probably be able to get competitive deals with a different lender.

What are the benefits of 0% finance?

When it comes to car finance, there are a number of options with 0% loans that may work in your favour. When comparing loans, consider:

• Shorter loan term. With shorter loan terms comes larger monthly payments. You’ll likely pay off your loan in just a few years instead of the average five to seven.
• No interest. Your payment goes directly towards the principal of the car.
• Optional extras. With a 0% car loan you may be able to roll the cost of alloy wheels, leather interior, sunroof or any other luxury items into the finance.

4 tips for making the most of 0% financing

There are few strategies to use when buying a car with 0% financing that can help you use your loan as efficiently as possible, they are:

1. Keep your loan under 60 months. There are longer car loans on the market that may seem attractive because of the low monthly payment, but you’ll pay loads more in interest and by the time the car is paid off, it will have depreciated in value greatly.
2. Make a large down payment. By making the largest down payment your budget allows, you’ll have a lower balance to pay off and may be able to take on a shorter loan term in order to own the car faster.
3. Get pre-approved. Getting pre-approved for a loan will not only give you bargaining power when shopping for a car, but you’ll also know exactly how much is in your budget.
4. Pick the car you love. Don’t rush into buying a car just because you’ve been offered a great financing deal. If the car isn’t the right fit for you, keep shopping so you don’t make a purchase you’ll regret later.

Bottom line

Before you lock yourself into 0% car loan, research banks and other lenders to see if they can offer you a car loan with terms that are more suited to your financial situation.

Frequently asked questions

• Do I need a down payment for a 0% car loan?

  This depends on the lender. However, a down payment will mean less balance to pay, resulting in lower monthly payments.

• Can I get a 0% car loan for a used car?

  It’s very uncommon. If you’re offered a 0% car loan for a used car, be sure to read all of the small print to see if there are any extra costs or fees to make up for the lack of interest.