A zero percent loan saves you money in interest payments over the term of your loan. Despite its interest-saving benefits, you'll find that restrictions apply to loan approval. Term restrictions may increase your car payment dramatically. If you have trouble affording a zero percent loan or obtaining an approval, other financing options may still save you money.
Credit Standing
To obtain low-rate financing, you must have good-to-excellent credit. You can often find this requirement in the fine print of advertised offers. If you don't have good credit, you can still use a co-signer to obtain your loan, as the co-signer's income and credit history secures your loan. Otherwise, you may have to apply for traditional financing instead, which requires that you pay an interest rate. To determine if you can obtain the zero-percent loan option, apply at the manufacturer's website or at a dealership.
Term Restriction
Term restrictions often exist as part of a zero percent offer. Terms may run from 36 to 72 months. A 36-month term raises a car payment substantially. Without a large down payment, you may find that the car payment is above your monthly budget. Check the manufacturer's website to determine if a term restriction exists. Then, use an auto loan calculator to figure your monthly payment amount and whether it's affordable to you. Edmunds.com offers an auto loan calculator that also calculates fees and tax charges based on ZIP code, which also affects your monthly payment amount.
Debt-to-Income Ratio
Banks consider a borrower's debt-to-income ratio to determine loan approval. A shorter term requirement that results in a high monthly payment may exceed your debt-to-income ratio even if you have good or excellent credit. The bank will review all monthly debts on your credit report and your income to determine whether or not you can afford your requested loan amount. You might be declined for a loan when the car payment exceeds $500 per month, but obtain an approval for $300 per month. You may have to provide a down payment or choose a longer term to obtain a loan, which may require a higher interest rate.
Other Options
If you can't meet bank requirements for zero percent financing, you have other options. Zero percent financing is commonly offered in lieu of rebates, which offer savings as well. Often, the discount offer can save you just as much money as the zero-percent loan over time. Use an auto loan calculator to calculate the differences in overall payback amount. Rebates are usually offered without lending requirements, meaning you can apply to a lender of your choice and still receive a price discount. Be sure to explore your interest rate and rebate options; zero percent does not always save borrowers more money.
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