The process of researching and purchasing a new car should take at least a month.
A month gives you a week to research, a week to test drive, and a minimum of two weeks to patiently wait for the best deal to pop up. Personally, I’d stretch that final step to at least two months, since patience is massively rewarded in the car shopping game.
But as someone who helps others buy cars as a side hustle, I often sense much more urgency in my clients’ voices. Why the rush, I’ll ask? Is it a gift? Do you need a car for work?
“No, I just really want to take advantage of these 0% APR deals!”
I totally get it. 0% APR sounds amazing – I mean, no interest payments ever until your car is paid off? You can just borrow tens of thousands of dollars for free? Awesome!
Objectively speaking, getting a 0% APR auto loan does save thousands in interest payments. But these auto loans come with a big catch that could end up costing you thousands more in the process.
So what exactly is a 0% APR deal, and why are auto dealers obsessed with them? What do they really mean, and why do I think they should be avoided?
What is a 0% APR deal?
You’ve probably seen the ads. Some guy who sounds like a monster truck announcer rattles off this all-too-common sales line faster than Ben Shapiro:
“C’MON DOWN TO OUR DEALERSHIP FOR $0 DOWN, 0% APR FOR UP TO 72 MONTHS!!!”
$0 down is pretty self-explanatory, but what exactly does 0% APR mean?
What is APR?
When you take out an auto loan, you eventually have to pay back your lender three amounts:
- 100% of your principle (i.e. the total amount you received in your loan).
Your annual percentage rate, or APR, is just a combination of numbers two and three. APR is always expressed as a percentage.
Still, combining interest and fees into one number didn’t make the math much simpler. In fact, APR formulae are pretty messy and complex. I could go on and on about APR, but I assume you’d rather just use MU30’s Auto Loan Calculator.
The key takeaway is this: lower APR means smaller monthly payments. On a $15,000 loan for a 36-month term, lowering your APR by 1% will save you around $250 total, lowering your monthly payment by around $8.
What is a 0% APR loan?
A 0% APR loan is a loan where you pay no interest and no fees. 100% of your monthly payments go towards paying off your principal.
Dealers will offer 0% APR for anywhere from 24 to 84 months. If you secure 0% APR for 24 months on a 36 month loan, you’ll pay interest for the last year.
But that’s an uncommon scenario. Typically, dealers and their third-party lenders want you to get a 0% APR to cover your entire loan term.
If a dealer offers you a 0% APR, they’re essentially letting you borrow their (or their lender’s) money for free. Sounds suspiciously generous. Why do that instead of just offering a discount?
Why are auto dealerships obsessed with offering 0% APR?
62% of Millennials plan to buy their next car at a dealership, according to TrueCar, so if that’s you, you should absolutely be made aware of this more subtle sales tactic.
Car dealerships offer 0% APR deals for any combination of reasons, none of which is charity. Here are three of the most common:
0% APR sounds amazing
To anyone paying off a home or a student loan, interest payments are aggressively unfun in both practice and principle. Think about it; even though you only took out money once, you have to keep paying a fee for your loan every single month for years.
I mean, when you buy a pizza, you pay a flat fee for the ingredients, labor, and tax. You don’t have to keep paying for every bite you take.
Interest is fair on paper. Your lender is entitled to extra money for taking on risk and providing a service. But that doesn’t make paying interest month after month any less frustrating.
Therefore, 0% APR is a greater stress reliever than a flat, one-time discount. To many consumers with multiple loan payments, 0% sounds massively appealing.
0% APR doesn’t devalue the car
Consumers respond differently to sales. Some see it as a bonus, others as a warning sign. Why is this item on sale? Is it of lower quality? Poorly reviewed? Why is the seller trying to get rid of it? Well, I’d better avoid it until I know for sure.
This is especially pertinent for cars, where dealer-to-dealer competition is so fierce. Dealers dare not offer “sales” that figuratively devalue their cars. They instead offer “cash back,” or better yet, 0% APR. Neither approach directly says “we’re trying to get rid of this car” but rather “we’re feeling generous.”
0% APR is a “sale” that they don’t have to honor for everyone
Imagine Macy’s offered a 40% sale on all coats. So you drive 30 minutes to Macy’s, pick out a coat, and the clerk rings it up. He then pulls out a calculator, makes a phone call, and 10 minutes later comes back to you.
“The best we can offer you is 10% off.”
“Wait, what happened to 40% off?”
“Let me talk to my lender – if you buy a handbag, maybe we can do 15%,” he replies.
You’d probably be pretty annoyed by this interaction. But you already drove 30 minutes, and you do need a handbag, so what the hell, you’ll take 15% off.
In retail, promising a sale and then revoking it at the register is an illegal practice called false advertising. But in the Bimmer-slinging business, this is common practice.
If a car dealer said “$1,500 off all cars” they’d have to stick to it. But if they say “0% APR for qualified buyers,” they build in a backdoor that allows them to reject certain buyers. Everyone comes in the door, but they get to pick and choose who actually gets the “sale” based on their credit score. Typically, only buyers with excellent credit (720+) qualify for 0% APR.
Now you know a few of the reasons why 0% APR deals exist. If your credit score is above 720 and you’ll likely qualify for one… should you take it?
To make sure you aren’t about to get bamboozled, always check Edmunds for reviews from professionals and from owners themselves before settling on a car.
Why should you be cautious of 0% APR deals?
In the above section, I elaborated on why 0% APR is such an effective sales tactic. It offers dealers all of the benefits of a regular sale (increased foot traffic, increased sales, etc.) with none of the drawbacks (devaluing the car).
Best of all, they don’t even have to honor the “sale” to everyone who walks in the door.
All that being said, 0% APR still sounds like a good deal if you have good enough credit to qualify. Considering that the average Millennial now has a FICO score of 668, you very well might!
(You can know for sure by checking your credit score now, for free, with Credit Karma).
But even if you have excellent credit, you should absolutely be wary of a 0% APR deal. In most cases, a specific car has a 0% APR deal attached for a reason.
Three reasons why dealers offer 0% APR on a specific car
You probably noticed that dealers offer 0% APR on certain cars at certain times of the year. That should raise an eyebrow.
Here are three common reasons why a specific car might have a 0% APR offer:
- The car is less than three months away from losing $5,000 in value. Even if they’re never driven, new cars lose up to 20% of their sticker value after one year, according to Edmunds. So rather than sell you last year’s model for $5,000 off sticker, a dealer would much rather sell it to you for full-price and 0% APR (which amounts to <$2,000 off).
- The dealer has hidden the cost of APR in the sticker price of the car. Imagine you’re looking for a new Honda Civic for $24,000. You find one at a local dealer for $23,000 and 0% APR, which amounts to ~$1,200 of interest saved. That sounds perfect, until you learn that the dealer next door has one for $19,500!
- The car is a clunker. Dealers don’t offer 0% APR or cash back on cars that sell. Kia Tellurides sell at full price. Honda Civic Type Rs sold for a markup. If a dealer offers 0% APR on a brand new car, it can mean it’s a good car they just bought too many of (though in that case, refer to #1). However, it more commonly means that it’s a hunk of junk that nobody wants.
Should you take bonus cash or 0% APR?
Sometimes a dealer will offer you bonus cash or a 0% APR on a new car. Which should you choose?
The right answer is neither.
In both cases, the dealer is trying to trick you into making a choice, both of which are favorable to them. It’s the adult world equivalent of “heads I win, tails you lose.”
For example, a dealer will often give you a choice between $1,500 cash back or 0% APR financing (worth ~$1,200). In both cases, the dealer is selling you a car at or near its MSRP, which is not a good deal.
The polite response is: “I’d like to finalize the out-the-door price before discussing financing or incentives.”
Always finalize the out-the-door price before discussing financing
There are two prices on a new car:
- The MSRP or “sticker” price that you see.
- The invoice price, which is what the dealer paid the manufacturer for the car.
The MSRP of a car is typically set at 10% to 20% over invoice. A dealer will sell as close to MSRP as possible (if not higher) in order to maximize their profit margin.
So when a dealer offers you a 0% APR or $1,500 cash back, they’re trying to sell you the car for around 15% above invoice or near MSRP. No bueno! A good price for a car is between 2% to 5% above invoice.
Does a 0% APR deal ever make sense?
Sometimes. A 0% APR might make sense only after you’ve:
- Confirmed that the car isn’t about to depreciate or is just a clunker.
- Negotiated the out-the-door price of the car.
Once you’ve knocked thousands off the sticker price of a car, the dealer probably won’t offer you a 0% APR because their profit margins don’t have enough cushion for it (good job). That’s totally fine, since lending options are available and you’ve already saved way more money than you’ll pay in interest over a 36-month loan.
To find out how much APR you might pay on a car loan, I recommend heading to LendingTree. There, you can follow their super simple wizard to get a competitive quote on a personal loan in minutes. You can also call them up to chat with an agent about your personal situation or to simply ask for guidance!
Once you get a loan offer, I recommend printing it out and bringing it with you to the dealership. It shows that you mean business and are to be taken seriously.
0% APR deals perfectly embody the old saying “if it sounds too good to be true, it probably is.”
Dealers love to market 0% APR because it’s like a sale they don’t have to offer everyone. And even if they do offer it to you, you should take it as a warning sign. 0% APR might be an indicator that:
- The car you’re looking at about to depreciate off a cliff.
- The car is already overpriced.
- The car is just a hunk of junk that didn’t sell.
To find out which, again, Edmunds is where you can research all new models, check for red flags, and find superior alternatives.
Even once you find the right car that passes all three tests, you probably still shouldn’t take a 0% APR deal. You’ll save much more money by negotiating thousands off the out-the-door price instead.