By getting a car loan with a 0% annual percentage rate (APR), you’ll avoid paying interest or fees on your loan. This can feel like scoring a great deal from your lender, but know that they don’t give away something for nothing.
To get one of these offers, you’ll usually need excellent credit, proof of stable income, and often a down payment. Additionally, there are potential downsides of 0% financing vehicles to be aware of.
Here’s a closer look at what to look out for, as well as how to get a 0% APR car loan.
Key Points
• A 0% APR car loan means no interest and no fees, with payments directly reducing the principal.
• Qualifying typically requires a high credit score, proof of stable income, and often a significant down payment.
• Positively impact creditworthiness by making timely payments, reducing credit balances, maintaining a long credit history, and limiting new credit applications.
• Downsides of 0% APR car loans can include short repayment terms, high credit score requirements, significant down payments, and availability for new or certified pre-owned vehicles.
• Refinancing options exist but typically do not offer 0% APR; they can provide lower interest rates and more favorable terms.
What Is a 0% APR on a Car Loan?
A 0% APR car loan has no fees and no interest rate. That means that all of the money you repay each month goes to paying down your principal, or the amount you borrowed.
Usually, when you take out an auto loan, your lender will charge you interest on the loan as well as fees to cover the cost of processing the loan. Car loan interest rates are typically based on the amount of the loan, the loan term (the period over which you repay it), as well as factors like your credit score. A loan’s APR represents your monthly payment, including both interest and fees.
In general, 0% vehicle financing is offered through a car manufacturer or dealer through the organization’s captive finance company. Banks and other lenders typically do not offer 0% APR loans, as lenders make their money through interest and fees.
Dealerships, on the other hand, can make money through the sale of a vehicle, so they don’t necessarily need to charge interest. What’s more, if they offer a customer a 0% APR, that customer may be more likely to buy a new car, and they may be willing to spring for a pricier vehicle.
These 0% APR loan deals are usually only available for new cars, or in some rare cases, for certified pre-owned vehicles. A 0% APR loan is a type of secured auto loan. This means that if you miss a payment, the dealer can repossess your vehicle.
Requirements for 0% Financing on Vehicles
When a dealer offers you 0% APR, they’re taking a big risk. As such, you’ll likely need a relatively high FICO® credit score to qualify. In fact, you may need a credit score of 740 or higher.
The dealer also may require that you make a hefty down payment to qualify for such an auto loan interest rate. And even if you make the down payment, you’ll also likely need to prove that you have stable income that will allow you to keep up with future payments.
Recommended: Is Proof of Insurance Needed to Refinance?
Ways to Qualify for 0% APR on Car Loans
If you’re hoping to secure a 0% APR, there are some steps you can take that may make it more likely a dealer will offer it. Namely, you’ll want to do everything you can to keep your credit score high.
Making Payments On Time
There are several factors that make up your FICO score, each of which is weighted differently. Your payment history is the most important factor, comprising 35% of your score.
This may come as no surprise, since lenders will want to know that you have a track record of paying off your loans before they offer you a new one. Make sure you always make payments on time and in full on open lines of credit.
Reducing the Balance on Your Lines of Credit
The amount you owe represents 30% of your credit score. If it looks like you’re using most of your available credit, lenders may worry that you could be overextended and thus at greater risk of defaulting on a new loan. Paying your existing balances can help your score.
Another way lenders may evaluate whether you’re overextended is by examining your debt-to-income ratio (DTI), which is the amount of money you owe compared to how much you earn. Lenders see borrowers with lower DTI as less risky and more creditworthy. You can also lower your DTI by paying off outstanding debts.
Building a Long Credit History
Length of credit history represents 15% of your score. Showing lenders that you have long relationships with other lenders is another way to boost your creditworthiness in their eyes.
Because your credit score takes into account how long your lines of credit have been established, it can make sense to keep lines of credit open. For example, if you have a couple of credit cards and mainly use the newer of those cards, it can still make sense to keep both accounts open. There are, of course, circumstances where this might not make sense, such as if one of the cards charges a steep annual fee.
Limiting Lines of Credit
The rest of your credit score is based on credit mix and new credit, both of which represent 10% of your score. Lenders will look to see if you’re able to juggle a variety of loan products, including credit cards, student loans, and mortgages.
Additionally, lenders will look at what credit accounts you’ve opened recently. People who open multiple lines of credit in a short period of time may be at greater risk of default. Particularly if you’re trying to build your credit score, you may consider limiting the number of new lines of credit you pursue.
Recommended: How to Calculate the APR on a Car Loan
How Does 0% APR Work When Refinancing a Car Loan?
One of the potential drawbacks of 0% APR is that repayment terms tend to be short, often 48 months or less. Monthly payments may be relatively high. If your payments become unmanageable, you may be able to refinance your car loan.
Automakers may use other tactics to entice you to purchase a new vehicle from them, including cash bonuses. You typically can’t take 0% APR and a cash bonus, and if you choose the cash, you may end up with a higher interest rate. If that’s the case, you might consider refinancing to a lower interest rate in the future.
In both situations, however, the downside is that applying for two loans within a relatively short period of time can affect your credit score. This is because each application requires a hard inquiry, which usually causes a temporary dip in a credit score of several points.
Recommended: Can You Remove a Cosigner From a Loan?
The Takeaway
A 0% APR car loan can be a good way for some auto buyers to finance a new vehicle since you don’t get charged interest. However, these offers are typically only available from auto manufacturers or dealers to those with high credit scores, large down payments, and other credentials. One option to this kind of loan is refinancing, or paying off your old loan with a new one that ideally comes with a better interest rate and possibly better terms.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
How can you get 0% APR on your car loan when refinancing?
A 0% APR offer is typically extended when you purchase a new car from a dealer or auto manufacturer. If you’re attempting to refinance an existing auto loan, you likely won’t be able to secure a 0% APR.
What credit score is required to get 0% APR on your car loan?
A credit score of 740 or above is typically required to qualify for 0% APR.
Is a cosigner required to get 0% APR on your car loan?
A cosigner is not required to get a 0% APR when you purchase a new or certified pre-owned vehicle. However, if you don’t qualify for this kind of loan on your own, a cosigner with strong credit could help you secure this kind of deal.
Photo credit: iStock/skynesher
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOALR-Q325-113