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A guide to 0% car finance

0% car finance could be a great way to make savings on the purchase of a brand-new car. So, what’s the catch? Is a zero interest deal too good to be true? 

Read our guide to 0% APR car finance and how it works, to help you decide if it’s the right car financing option for you.

0% car finance could be a great way to make savings on the purchase of a brand-new car. So, what’s the catch? Is a zero interest deal too good to be true? 

Read our guide to 0% APR car finance and how it works, to help you decide if it’s the right car financing option for you.

Written by
Sajni Shah
Consumer expert on money and utilities
Posted
30 MAY 2024
6 min read
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What is interest-free car finance?

0% car finance is a type of interest-free loan. It allows you to spread the cost of a brand-new car over several months without paying interest. 

As with any loan, you’ll pay off what you owe in monthly instalments for a set period. But, unlike most other types of borrowing, a 0% car finance deal means you won’t be charged interest. 

When comparing car finance deals and other types of loans, you’ll typically see the interest displayed as APR (Annual Percentage Rate). This refers to the yearly cost you pay (including fees) for borrowing the money. 

So, in theory, a 0% APR car finance deal should mean you’ll be paying the same as a cash buyer, just spread out over a longer period. 

But interest-free car finance deals aren’t common. And those that are available tend to be for a limited period. 

It’s important to understand what you’re paying for, and to read the terms and conditions, before jumping into a 0% deal. There may be hidden charges and extras that could inflate the original price of the car. You might find that you won’t be saving as much as you expect.

Unfortunately, you can’t currently compare 0% car finance deals with Compare the Market.

How does 0% car finance work?

Interest-free car finance typically works in the following way:

  1. 0% car finance deals are usually offered directly by manufacturers and approved car dealerships as a way to entice new customers.
  2. Typically, you’ll put down an up-front deposit, then pay monthly instalments via direct debit over a set period – for example, 36 months. 
  3. No interest is added to what you owe. However, watch out for extra charges and add-on fees that could make the deal less competitive overall. 
  4. Dealers may offer 0% car finance on their Hire Purchase (HP) or Personal Contract Purchase (PCP) plans. 
  5. At the end of a PCP 0% finance deal, you’ll have the option of making a final ‘balloon’ payment if you decide to keep the car.  
  6. 0% deals are usually only available on brand-new cars, not used models. 
  7. When you apply, you’ll need to undergo a hard credit check to assess your affordability. Generally, you’ll need a good to excellent credit score to be accepted for 0% car finance.

What are the disadvantages of 0% car finance deals?

There are some drawbacks to 0% car finance deals, so it’s important to do your research before deciding if one is right for you. 

Disadvantages of 0% APR car finance:

  • Limited choice – 0% finance may only be available on selected vehicles, so you might not get a deal on your preferred make or model. Also, 0% finance isn’t usually offered on used cars.
  • Extra fees – read the small print for extra fees and charges that could make your chosen deal less competitive overall.
  • Large deposit – lenders usually insist on a hefty up-front deposit for 0% deals. 
  • Shorter terms – 0% APR deals usually have a shorter term than other car financing deals. Your monthly repayments may be higher, but it does mean you’ll pay the car off quicker.
  • You’ll be credit checked – you’ll typically need a good to excellent credit score to get 0% car finance.
  • You can’t have it all – other incentives and discounts offered by manufacturers and car dealers can rarely be used together with 0% deals.

Are 0% APR car loans worth it?

Whether a 0% APR car loan is worth it depends on the terms and conditions of the deal on offer and, of course, your financial situation. 

If you can comfortably afford the monthly repayments, then a 0% car finance deal could offer you some great savings. The APR charged on most car finance plans can add thousands over the course of the agreement. With a 0% deal you’ll avoid those extra costs. 

Spreading the cost over several months also gives you the opportunity to buy a brand-new model that might otherwise be outside your budget.  

But don’t fixate on a 0% deal just because it says ‘0%’. Have a look at other car finance options out there. A low APR car finance deal that offers lower monthly repayments over a longer period might better suit your needs. Or you may find that incentives and discounts currently offered outweigh the appeal of a 0% deal. 

What to look out for when considering an interest-free deal

Not all 0% APR car finance plans have the same terms and conditions. If your mind’s set on a 0% deal, here’s what to consider before jumping in:

  • The price – make sure the price reflects the true value of the car and isn’t inflated as part of the finance deal.
  • Unexpected fees – check the T&Cs. Any administration fees should be clearly listed so you know exactly what you’ll be paying at the beginning and end of your finance agreement.
  • Annual mileage limits – PCP car finance deals typically have mileage restrictions and will impose penalties if you go over these. If you choose this option, make sure your annual mileage limit is reasonable and fits within your driving needs.
  • Fair wear and tear – car leasing agreements often charge a hefty fee for excessive wear and tear of the vehicle. Make sure you understand what ‘reasonable wear and tear’ means before signing up.
  • Customer support – have a look at online reviews (Trustpilot is a reliable source). You’ll want the reassurance that a good customer support service is available for the length of your agreement.
  • Do your sums – compare the overall cost of your 0% package with other car finance deals on the market. You may find a low APR deal that’s better suited to your budget and lifestyle.

Frequently asked questions

Can I get an electric car on 0% car finance?

Yes, you can get an electric car on 0% finance. But it depends on the make and model.

Where can I get 0% finance on a new car?

0% car finance deals are normally available directly via the car manufacturer or an approved dealership.

Just be aware that 0% APR deals may only be available on selected makes and models.

Is 0% financing available on used cars?

It’s unlikely you’ll be able to find a 0% car finance deal on a used car.

However, there are other financing options for used cars. For example, you might be able to buy a used car with a 0% purchase credit card. It allows you to pay upfront, then spread the cost over a set period without paying interest.

Just make sure you pay off the full amount before the 0% introductory period ends. Otherwise, you’ll be charged a hefty interest rate on the remaining balance.

Can I get 0% car finance if I have bad credit?

It’s very unlikely you’ll be accepted for a 0% car finance deal if you have bad credit.

Interest-free loans are high risk for lenders, so they want to be confident you can make your repayments every month.

Typically, you’ll need an excellent credit rating and strong credit history to be eligible for 0% APR car finance.

Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

Learn more about Sajni