Car manufacturers are constantly offering low-interest loans and other incentives to help sell cars.

With “normal” interest rates around 3.0% at the time of this writing, it’s not much of a stretch for car companies to offer 1.9%, 0.9%, or even 0% loan rates.

A zero-percent (0%) loan means no interest at allno finance charges for the life of the loan. Some car company deals limit no-interest loans to 36 months but some extend it all the way to 60 or even 72 months.

Understand that no-interest loans are not something you can get by negotiating with a dealer. These promotional loan deals are only offered by car manufacturers on selected models and styles for a limited amount of time.

How much money do you save with a 0% loan?

Let’s assume a $25,000 auto loan for 36 months at an interest rate of 4% APR. You would pay $738.10/month and a total of $1572 in finance costs over the life of the loan. Extend the loan to 60 months, and you would pay $460.41/month and a total of $2625 in finance costs. By extending your loan to 60 months, you lower your monthly payment but pay more in finance costs.

Now, let’s compare the same loan to one with no interest — 0% APR.  No-interest loans are easy to calculate. Simply divide the loan amount by the number of months in the loan. So our $25,000 loan for 36 months would result in $694.44/month payments and zero finance cost. Our 60 loan payment would be $416.67/month and zero finance cost.

By going with the 0% loan, we saved about $44/month on both the 36 and 60 month loans,  and saved $1572 and $2625 on total loan cost.

What if there is also a cash-back rebate? Which do I choose, the rebate or 0% loan?

When both a rebate and 0% loan are offered, you must choose between the two. If you choose the rebate, you’ll pay the “normal” interest rate on your loan.

Let’s use the same 4% loan scenario as above but this time we’ll assume a $2000 rebate, which you’ll apply as a down payment. For 36 months, you’ll pay $679.05/month and $1446 finance cost. For 60 months, you’ll pay $423.58/month and $2415 finance cost. As you can see, our monthly payment is only $15.39 less than the 36 month 0% loan deal. For 60 months, our rebate deal costs us almost $7 more than the 0% loan deal.

What does this mean?

It means that 0% loan incentives are about the same as taking a $2000 rebate. However, if the rebate is less than about $2000 (depends on amount of loan), the 0% loan is the best deal. If the rebate is more than $2000, the rebate is the best deal.

There’s another factor to consider, however. In order to qualify for a 0% loan offer, you must have excellent credit, which is not a requirement to take a rebate. If you don’t know your current credit score, you need to get it before you go car shopping. What’s your FICO score? Find out now when you check your credit report for $1 at!


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