Auto Loans

Can I Really Get a 0% Car Loan?

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Is 0% auto financing just a scam? That’s the question that popped in my mind recently when my mother-in-law, who is fastidious about her finances, was turned down for that rate when she bought a new car. If someone like her, who has a history of no missed payments on any of her bills and very minimal debt, can’t qualify, who can?

While it’s not a scam, interest-free financing isn’t always easy to get. And even if you do qualify, you may not want it.

“Typically 0% loans are used by the manufacturers as a low cost leader to generate showroom traffic,” says automotive credit expert Matt Briggs, CEO of CreditJeeves.com.

“Only one out of 10 consumers actually qualifies for 0% and there are many factors that come into play,” warns Tony Le, pricing manager with Edmunds.com. There are typically two hurdles consumers who don’t want to pay interest on a car loan have to overcome.

High Scores Pay Off

The first is the high credit score that is often required.

According to Experian Automotive, the average credit score of borrowers who secured interest rates of 1% or less on their auto loans in the first quarter of 2014 was 748. (The scoring model used was VantageScore 3.0, which goes up to 850.) Only 8% of borrowers qualified for loans with rates of 1% or less, says Melinda Zabritski, senior director of automotive credit for Experian Automotive.

A Car Payment or a Mortgage Payment?

The other big hurdle? The monthly payment.

The average vehicle loan term is now 66 months, according to Experian, and the average amount financed is close to $30,000 ($27,612 to be exact). But some interest-free offers only extend to a 36-month loan. For a $30,000 loan, that would mean a monthly payment of $833 a month. “That’s the catch,” say Le.

It’s not always the case that you have to take a short-term loan, however. Some manufacturers offer 60- or even 72-month financing with no interest.

“When you are negotiating, are you negotiating rate, or are you negotiating payment?” asks Zabritski. “If you are going to try to get a lower payment, (no-interest financing) might not be available on longer-term loans.”

One more potential pitfall: You may forgo the cash-back rebate in order to secure that rock-bottom rate, Le warns. Edmunds.com offers a calculator that compares APR with the rebate to figure out which is the better deal.

The Best of Both Worlds

Even if you don’t qualify for a 0% loan, you may be able to get a low interest rate on a longer-term loan that fits your budget. Here’s what kind of rates consumers pay, on average, in different credit score ranges.

Auto Loan Financing

As you can see from the table, while the difference between the average monthly payment consumers with poor credit are paying versus those who have excellent credit is only $35 a month, over the life of the loan, it adds up to $6,470 — and that is a lot!

While there are consumers who get loans at 0% today, “anything between 2% – 3.5% is a good rate,” Zabritski advises.

If you’re not sure of your credit standing, you can check your credit score for free at Credit.com. Along with two scores, you’ll also get monthly updates and an action plan for your credit. The best time to check it is before you need to buy or replace your vehicle, since fixing mistakes or improving your credit can take time.

In addition, it’s a good idea to line up a loan before you walk into the dealership. If your dealer can beat that rate, great. If not, you know you’re covered. Credit unions (a popular source of low-rate vehicle financing) are even able to work with consumers across the country. You can shop for a nationwide credit union car or truck loan here.

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