Ever hear the phrase “too good to be true?” It can often apply to the world of car financing, especially with tempting offers like 0% interest car finance. These deals may sound like a steal, but it’s important to know that there's more to the story before you sign on the dotted line. Find out more about how 0% car finance works and learn about its potential drawbacks right here with Savvy.

What are 0% car loans and how do they work?

0% car loans, also known as zero percent, interest-free or no interest car finance, are a financing option where borrowers can purchase a vehicle without paying any interest on the car loan. In essence, the borrower only repays the principal amount borrowed, with no additional interest charges added to the loan.

This type of financing arrangement is typically used as a promotional offer to attract customers and stimulate car sales. It's important to note that not all borrowers may qualify for 0% finance, as eligibility criteria such as creditworthiness and loan term may apply. Additionally, these offers may only be available for specific car models or during certain promotional periods.

While 0% finance can seem like an attractive option, it's essential for borrowers to carefully review the terms and conditions of the offer. In many cases, the price of the car you’re buying may be inflated beyond what it otherwise would cost to account for the interest you would’ve otherwise paid. There are other ways that 0% offers can end up costing you the same or more money as a regular loan, which are outlined below.

Where can I get a 0% car finance deal from?

Unlike traditional car loans offered by various banks and online lenders, 0% car finance typically isn’t offered directly by financial institutions. Instead, it's a promotional offer provided by the car manufacturer or dealership themselves. Here's how it works:

• Car manufacturers: car manufacturers can use their in-house financing companies to offer 0% car finance deals on specific models or during promotional periods.
• Dealerships: many independent dealerships may offer 0% financing, but they may partner with specific lenders who offer them special rates for these promotions. These deals are often on used cars or specific models with slower sales.

What should I consider before taking out a 0% car loan?

There’s a range of factors to consider before applying for a 0% car loan through your dealership. These include:

• Inflated cost of car purchase: while a 0% finance deal may sound enticing, some dealerships may offset the absence of interest by inflating the purchase price of the vehicle (as mentioned earlier). Carefully review the total cost of the vehicle to ensure that it remains competitive compared to other financing options.
• Short interest-free terms: 0% car finance deals often come with interest-free periods that only last for a limited time, rather than the whole term. This means your loan could revert to a higher interest rate once this period is completed (often after 12 or so months), costing you more overall.
• Mandatory balloon payments: many 0% car finance deals, like other types of dealer finance, may require borrowers to make a balloon payment at the end of the loan term. A balloon payment is a large lump sum payment that covers the remaining balance of the loan based on the residual value set by your dealership. These can decrease the cost of your monthly payments but will increase the overall cost of your loan.
• Potential for decreased car trade-in value: opting for a 0% car finance deal may limit your ability to negotiate on the purchase price of the vehicle compared to what you may be able to do otherwise. Additionally, some dealerships may offer less favourable trade-in deals for vehicles financed through 0% finance arrangements. Consider the potential impact on the trade-in value of your car when choosing a financing option.
• Fees included in your loan agreement: even with a 0% finance deal, borrowers are likely to still incur fees and charges associated with the loan agreement. These could include administration fees, origination fees or early repayment penalties. Review the loan agreement carefully and ask the lender or dealership about any fees included in the financing arrangement to avoid unexpected costs down the line.

What are the alternatives to 0% car finance when purchasing my vehicle?

The most common alternative to a 0% car loan is seeking out a traditional car loan with a lender. Although these do come with interest, carefully considering the options at your disposal may result in a more favourable deal for your needs, according to Savvy Managing Director Bill Tsouvalas.