Sounds too good to be true, doesn’t it? An interest free auto loan? What’s the catch? The truth is that there really isn’t a catch, per se, as the loan is indeed interest free. However they still need to make a profit somewhere. Here are some things to take note of if you are thinking of getting an interest-free loan.
The signs saying 0% interest are everywhere. That is just used to lure you into the dealership. However this rate is reserved for only those with perfect credit scores. Of course, they won’t tell you this until you’ve test driven cars and had your credit report pulled. They’re hoping you’re too far involved in the process to back out when they let you know you don’t qualify for an interest-free loan.
These zero interest loans are usually only offered on new vehicles, not on used ones. The reason for this is that the financing will likely come from car manufacturers, who can offer much better loan terms. When you buy a new car, you are also not getting a good deal already. The moment you drive it off the lot it has already lost thousands of dollars in value. Instead, buy a 2-3 year old car. It’s still in like-new condition yet it won’t depreciate in price as quickly.
Does the auto loan have zero percent interest for the entire life of the loan, or only for the first year? Sometimes the rate is temporary. This is still a good option if you plan to pay off the entire loan before the interest rate adjusts.
The dealer needs to make their money somewhere. If they can’t make a profit off the interest, they will make it up elsewhere. Expect the dealer to hard sell you on many extras, such as an extended warranty. So while an interest free loan sounds great, you will end up paying for a new car at full price with extras. In the end, you might be better off with a traditional auto loan on a used car instead.