0% car finance and 1% car finance: What are the facts?
0% car finance or 1% car finance means you make repayments on your car loan but you’re charged either no or a very small amount of interest.
It’s a kind of car finance that’s most commonly offered by car dealers. Sounds too good to be true? That’s because generally it is.
0% or 1% car finance is often simply used as a sales tactic.
Making the finance seem incredibly cheap gets customers in the door and sales across the line. But the costs for the buyer are often tagged on elsewhere.
What to watch out for with 0% car loans
0% or 1% interest might only apply to part of the loan term (an introductory offer)
You may need an extremely good credit score to be eligible
The sale price of the car might be inflated and non-negotiable
0% finance may only be offered on some cars
You may be offered a lower trade-in price
You may have to agree to a shorter term with high monthly repayments
The finance may come with a balloon payment that makes the regular repayments seem lower
Why do dealers offer 0% car loans?
The short answer is to help them sell cars. Here’s how 0% car finance offers do that.
1
They draw in potential buyers
Dealerships know that advertising 0% car loan or 1% finance will attract customers. Even the ones with no chance of qualifying.
Because they have bad credit, or are self employed and need a specialist low doc car loan.
But by the time they find that out, the customer is already sold on a car. And they could be talked into a different, more expensive car loan.
2
They help clear stock
A dealership may simply have cars it's keen to get rid of. They may offer 0% interest to ensure they can clear that remaining stock.
This isn’t necessarily a bad thing for you if you genuinely want the car. But it’s still important to understand the dealer’s motivation.
3
A 0% finance offer may make the dealership money in other ways
Instead of making money through the finance itself, the dealer may be paid commission, earn money through fees or through upselling you on add ons and upgrades.
For example, they may earn a commission by referring you to a preferred insurance partner. This will rarely save you money versus doing a car insurance comparison yourself.
What should I ask before signing up for a 0% or 1% car finance deal?
Here are some question to ask the dealer so you know what’s actually being offered:
- Can you please list out ALL of the fees I’ll be charged?
- Am I eligible for the best rate based on my credit score?
- What will my regular finance repayment be?
- Will I be able to refinance the car loan with another lender later on if I want to switch?
- Is this the BEST price you can do on the car?
- What is the loan comparison rate? (This gives a better indication of cost than the car loan interest rate does)
- Will I need to pay a deposit on the vehicle?
- What will the TOTAL amount to be repaid be?
- Are you incentivised to sell finance to buyers (e.g. through commission)?
How do you find the best deal on your car finance?
There's a decent chance 0% or 1% car finance will not be the best deal. The best approach is usually to research and compare car finance options before you go to the dealership.
This is what to look for:
- A low interest rate (secured car loans usually have the lowest rates)
- Low upfront and ongoing fees
- A choice of loan terms to suit your needs
- Flexible repayment options
- The ability to pay off the loan early without penalty
You can use our car loan calculator to see what your repayments and total costs will be on different loans.
When you’ve found a loan that ticks the boxes, apply for car loan pre-approval with the lender.
Then go car shopping with your finance locked in.
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