0% car finance deals

Are interest-free car loans right for you?

Interest can be your best friend when it comes to maximising your savings, but it can also significantly increase the cost of borrowing. So, for many, 0% interest loans may seem like a blessing – particularly when it comes to affording a car. But does the old adage of "if it seems too good to be true, it probably is" ring true for 0% car finance deals? Potentially. Let’s do some digging. 

Who’s this guide for? This guide is for anybody who’s considering applying for a 0% car finance deal.

To learn more about car finance and the different options, check out the guides below.

Car leasing | Personal car loans | Hire Purchase | Personal Contract Purchase

What is 0% car finance?

A 0% car finance deal (also referred to as a 0% interest car finance deal or a 0% APR car finance deal) is a type of financing plan applied to car finance agreements, such as Hire Purchase or Personal Contract Purchase deals.

It lets you buy a car and pay for it in instalments with no interest charged – although many 0% car finance deals do come with additional fees and other costs, in addition to the cost of the vehicle, to offset the fact you're not paying interest.  

Any interest rate on borrowing – whether for car finance, a credit card or loan – is referred to as an APR, which stands for 'annual percentage rate'. If you want to know more about how APRs work, take a look at our guide to interest rates.

How does 0% car finance work?

Rather than buying a car upfront, by using savings you've put aside for example, 0% finance car deals allow you to spread payments over a particular period – for example, 36 months – without paying any interest for the privilege. 

These agreements can be difficult to find, however. Car finance deals with 0% interest are often limited-time offers used by car dealers and finance providers to promote particular cars and/or get new customers through the door. You’ll generally need a healthy credit score to secure a 0% finance car agreement too – find out how your credit score can affect your approval below.

What are the repayment terms?

Every month, you’ll make a fixed repayment until the full amount you've borrowed is paid off. You won’t need to pay any interest for the interest-free period – although some 0% finance car deals are only interest-free for a certain time, such as for the first year of repayments.

Most 0% finance car deals come with additional fees and admin charges – as well as a larger deposit than standard car finance deals. It’s important that any fees are made clear before you sign any finance agreement, otherwise they could be classed as ‘misleading’ under consumer protection regulations. 

How does 0% car finance affect the overall cost of the car?

655194127

The prices of cars that come with 0% finance deals are often inflated, so sellers can recoup the lost interest – with many deals also featuring extra fees for the same reason.

You should therefore always closely read a deal's terms and conditions AND compare the overall cost with both the car's market value and any standard car finance deals you can find – in other words, those charging interest.

You don't want to pay over the odds just to save on interest – it'll be a false economy. Carefully consider your budget from the outset for the same reason – don't be tempted to splash out on a more expensive vehicle than you really need or want for sake of a 0% interest deal.

The pros and cons of 0% APR car finance

Pros

  • Lower cost of borrowing. No interest means paying less compared to a traditional loan overall – at least in theory. This means your monthly payments should be lower, potentially making the car more affordable in the short term. But as we've said above, you need to make sure you factor in the price of the car and any extras to make sure you're not paying over the odds.
  • Predictable payments. Since you shouldn’t encounter fluctuating interest rates on your repayments, budgeting should be more straightforward. 

Cons

  • Stricter qualifications. Unlike some traditional loans, you’ll generally need a good to excellent credit score to secure a 0% car finance deal. This puts them out of reach for many.

  • Lack of car choice. 0% car finance agreements are typically only applied to a limited pool of cars. They’re also regularly offered on models a manufacturer wants to sell quickly, such as cars in garish colours or those with unappealing modifications – which isn't always ideal.  

  • More expensive purchase price. As explained, lenders often offset the cost of a 0% APR car deal by increasing the purchase price of the vehicle. As such, you may not actually save much – if anything at all – with a 0% car finance deal. 

  • Extra fees. Extra fees often added push up the overall price, something that can make 0% car finance deals less competitive than traditional loans

What to look out for when taking a 0% deal

1835827408

Not all 0% car finance deals are the same. If you’re considering signing up to an agreement, look out for the following features: 

  • A flexible loan term. You’ll want a say over the loan repayment period so you can choose one that’s right for you. For example, longer contracts give you more time to pay off the loan, but give the car more time to depreciate. Whereas shorter contracts mean higher monthly payments, but paying off the loan quicker.   

  • Fair pricing. With the price of 0% finance cars often inflated to make up for the lack of interest being paid, make sure the car’s cost reflects its market value. 

  • Upfront costs. Hidden fees can cause the cost of a 0% finance car to spiral, so look out for these before proceeding. 

  • Reasonable annual mileage limits. Your finance agreement will have a set annual mileage allowance, and you'll get charged for any miles you exceed this by. So make sure the allowance will cover you for the miles you will be covering each year, otherwise excess mileage fees can see the cost of your deal surge.

  • Fair wear-and-tear policies. Similarly, any wear and tear policy you agree to should be reasonable.  

  • Good reviews. Although positive reviews or testimonials of a finance company or dealership are never foolproof evidence of its reliability, they can give you a good indication. 

Does my credit score impact my chances of getting approved?

Generally speaking, only those with a good to excellent credit score can get a 0% finance car deal. 

These agreements can be some of the more generous ones offered by lenders, meaning they like to feel extra confident that borrowers won't miss repayments or be unable to afford repayments. Your credit score is the most tangible indicator of your creditworthiness, so it’s little wonder that lenders only offer 0% car finance deals to those with a healthy credit score.  

In some instances, you might be able to use an eligibility calculator to check your chances of being approved a car finance loan, before you apply. 

Learn more about credit scores. If you'd like to find out more about credit scores, including how to improve yours, check out the guides below:

Check your credit report for free | How to improve your credit score

How to build your credit history | Credit cards for bad credit

0% car finance FAQs

  • What details are needed for a 0% car finance deal?

    The exact information you’ll need to give varies by lender, however most will ask for the following:

    • Your personal information. This includes your full name, date of birth and contact details.

    • Your employment and income details. You will probably need to provide your employer's name and contact details – as well as recent payslips or proof of income (such as bank statements and tax returns if you're self-employed).

    • Your address details. For example, how long you've lived in your current home and previous address details if you've moved recently. 

    • Some financial information. A lender may want details of existing financial commitments (such as credit cards and mortgage), bank statements showing your income and outgoings, and info about any other assets or liabilities. You will almost definitely be credit-checked too.

    • Your vehicle information. This includes the brand, model and registration number of the 0% finance car you’re looking to buy, plus the price and the amount you’re putting down as a deposit. 

    • Your ID documents. Lenders will want proof of identity (such as a passport) and proof of address (such as bills or a council tax statement). 

    • Your driving licence. Of course, you'll need to show a copy of your driving licence. Check if yours is still valid by reading our Driving licence renewal guide. 

    • Your bank details. These are needed to set up the Direct Debit for your monthly repayments.

    • Your insurance information. Lenders may ask for proof of car insurance cover. Find out how to get cheap insurance in our guide to the topic. 

    Be sure to check your finance provider's exact requirements, as it may have additional criteria or require different documentation.

  • Is there an age limit to finance a car on 0% APR?

    As with any kind of car finance deal, applicants must be over 18 to secure a 0% APR agreement, despite the legal driving age being 17. This is because only adults can enter legally binding financial agreements of this kind.

    That said, even being 18 doesn’t guarantee approval for a 0% car finance deal. Lenders want to feel confident that you’ll make the repayments, and a healthy credit history is the most important indicator of this. Good credit scores take time to build up, so you likely won't get accepted for a 0% car finance deal until you're at least a few years older.

  • What happens if I miss a payment with 0% car finance?

    The first time you miss a payment, you’ll probably be contacted by the lender to ask why. If you keep doing so, you’ll be marked ‘in default’, which will appear on your credit report. This will likely prevent you from applying for more credit. 

    If you’re ever struggling to make your repayments: contact the lender as soon as possible. This enables it to potentially help you – for instance, by extending the loan term, modifying your monthly repayments or temporarily pausing instalments. Do bear in mind that such measures may increase the overall cost of borrowing, even if they help in the short term.

    Should you continue to miss your repayments and fail to let the loan provider know, it could take legal action against you. This can result in anything from repossession of your car to being made bankrupt over your debt. 

  • Are there limitations on the type of cars available with 0% finance?

    Generally speaking, 0% car finance is only offered on brand new vehicles.  

    One reason for this is that these deals are sometimes used to promote new models. Another is that younger cars are considered less risky investments by lenders considering they have higher resale values, lower likelihood of mechanical issues and often come with warranties.  

    All in all, it’s rare to find 0% finance on used cars.  

MSE weekly email

FREE weekly MoneySaving email

For all the latest deals, guides and loopholes simply sign up today – it's spam-free!

Spotted out of date info/broken links? Email: brokenlink@moneysavingexpert.com