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
Often buried in the fine print, it may be an introductory offer, meaning it applies only to the first year of your finance and not the entire loan term.
You may need an extremely good credit score to be eligible
Having an excellent credit score means 853 or higher, according to leading consumer credit reporting agency Equifax.
The sale price of the car might be inflated and non-negotiable
This helps recoup the cost of offering a low or no-interest rate. In many cases, buyers may miss out on discounts or price negotiations that would otherwise be available when paying with cash or arranging finance independently.
You may be offered a lower trade-in price
While 0% may seem appealing, a lower trade-in price helps the dealership offset the cost of the interest-free offer.
You may have to agree to a shorter term with high monthly repayments
This could potentially add hundreds of dollars to your car loan repayments. For example, a $30,000 loan at 1% p.a. over 3 years would cost roughly $333 more in monthly repayments compared to a 5-year term.
The finance may come with a balloon payment that makes the regular repayments seem lower
A car loan balloon payment is typically 20-40% of the loan amount, payable at the end of the loan term, depending on the agreement you’ve made with the lender.
0% finance may only be offered on some cars
It’s often only available on select models or specific stock, usually as part of a promotional deal. It’s typically offered on slower-selling vehicles or older stock rather than the latest or most popular models.
0 interest car deals example
Here’s an example of a current Toyota finance promotion: while it features a low comparison rate, the offer only applies to new and demo 2023/2024 models of a specific vehicle. The fine print also specifies a 48-month loan term, which will mean the repayments will be higher than car finance with a 3-5 year term.
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 be repaid?
- 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 offer the lowest interest rates because the vehicle is used as security, reducing the lender’s risk.
- Low upfront and ongoing fees: Watch out for application, monthly and early termination fees, as they can significantly increase the total cost of the loan.
- A choice of loan terms to suit your needs: Being able to choose a loan term that fits your budget and financial goals helps you manage repayments more effectively.
- Flexible repayment options: Look for lenders that allow you to make extra repayments or choose weekly, fortnightly or monthly payments to align with your income.
- The ability to pay off the loan early without penalty: Avoid loans with early exit fees so you can pay off your debt sooner and save on interest if your situation allows.
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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