How Zero Percent Car Loans Work

“Wait, money for nothing? You can sign me up right now!”


If this is your first thought when you see a zero percent financing deal, you’re certainly among the mainstream. However, it’s a good idea to hold for a beat before you somersault into the nearest dealership and backflip into a chair at a salesperson’s desk.


You’ll want to understand how zero percent car loans work first. 

Banks Giving Away Money?

Rather than banks, these financing deals generally come from the manufacturers. After all, it’s better to loan money on a car at zero interest and sell it, than hold out for someone willing to pay interest on a loan to buy a car that’s been nailed to the showroom floor.


The manufacturer still makes money on the deal because the car was already sold to the dealer in the first place. The promotion helps the dealer get rid of the car and make a bit of profit to keep the store open. This, in turn, maintains the outlet by which the manufacturer gets its cars into the hands of consumers.


How Can They Do This?

First and foremost, every zero percent financing ad you’ll see will have the phrase “on approved credit” in the fine print. And, in this case, when we’re talking approved, we mean scores in the 700-range and above. Marginal borrowers should look elsewhere. These deals are almost always reserved for the crème de la crème.


Further, if you keep reading, you’re likely to see language along the lines of “on selected models only.” In other words, rather than walking into the showroom, selecting the car of your choice and signing a free money deal, you’ll choose from among the cars the manufacturer has deemed to be requiring of this financial incentive.


In other words, it’s usually applied to slow-selling models, closeouts at the end of a model year or some other less-than-hot-selling product. The goal of the zero-percent promotion is usually to clear the floor for something with appeal all on its own.


By the way, you should also anticipate the fact that the car will be sold at a fixed price. They have to make sure the amount they get allows them to keep wearing their shirts, even after foregoing the interest they would’ve made on a loan.


How They Get Around False Advertising

Here, we must once again refer you to the ad’s fine print.


If you go in thinking you’re going to get a Thunder Hawk 1500 and the dealer says, “Sorry, you have to buy a Snow Kitten 750 to take advantage of this deal,” they’ll hand you a magnifying glass and point to the tiny print in the ad when you object. They’re covered, as long as it was disclosed in the ad.


So, do yourself a favor. Read carefully before you leap into action.


What’s more, even if you were willing to take the Snow Kitten, your credit score would still have to be strong enough to qualify for the deal. Which is where it often gets even better for the dealer.


You’re already in the store and the car is looking good to you. You’ve driven it, fallen in love with it and you’re ready to take it home. Then, you’re told your credit score means you’ll have to consider a conventional loan instead of the zero percent deal. At that point, a lot of people usually go ahead and buy the car with a regular loan.


Before you do so, check with a lender like RoadLoans to see if you can qualify for one of their low APR loans. Even though you’ll pay some interest, you might still come out ahead of the typical dealership loan. As you can see, taking some time to understand how zero percent car loans work will save you a lot of anxiety, disappointment and money.