If you want to save money when buying a new car, do your homework first. Check your credit, set a budget and research models within your price range. Consider factors that can significantly increase the cost of ownership, such as fuel mileage and insurance costs. Finally, look closely at financing options. If you see dealer advertisements for zero APR car loans, definitely investigate, but do not automatically assume this is the best option for you.
Identification
Annual percentage rate (APR) is the cost to finance your car. When you have an APR car loan, the sticker price of the car and interest on the loan determine your monthly payment. A zero APR car loan has no interest charge, leaving only the sticker price to determine the amount of your monthly payment. For example, if you purchase a car for $25,000 at an APR of 3.99 percent for 48 months, your monthly payment will be $564.36 and the total cost of your car will be $27,089.28. At a zero APR, the same car will cost $520.83 per month and the total cost will be the sticker price.
The Facts
Zero APR car loans are a marketing tool automakers use when new cars sales are down. Because the objective is to increase sales on slower moving cars, this type of dealer financing is usually make and model specific, often excluding compact or fuel-efficient models according to SmartMoney.com. In return for a zero APR, dealers are often unwilling to negotiate on the price of the car, and most often you are not eligible for additional incentives, such as a cash rebate.
Requirements
Unless you have a good credit rating, it can be difficult to qualify for a zero APR car loan. In general, you need at a minimum a credit score of 680 to 700, according to SmartMoney.com. In addition, most also require a down payment of at least 10 percent with good credit and up to 20 percent if your dealer will consider a zero APR car loan with a credit score of below 680. On a new car costing $25,000, your down payment could run between $2,500 and $5,000.
Considerations
A zero APR car loan can be, but is not always, the best option. This is especially true if the dealer is offering a cash rebate option. It is a good idea to calculate the overall cost of both options before making a decision. For example, say you are considering a car that costs $20,000, you have a trade-in worth $4,000 and your options include a zero APR loan for 36 months with no rebate or a 3.99 percent APR for 36 months with a $2,000 rebate. If you choose the zero APR option, your monthly payment will be $444.44 and the total cost will be $16,000. Alternately, if you choose the rebate option and apply the rebate to the cost of your car, your monthly payment will be $413.27 and the total cost will be $14,877.85, saving you $1,122.15.
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