When shopping for a new car you may be surprised to see dealers offering new car loans at a 1% p.a. or even 0% p.a. interest rate. At first glance, this offer is as it appears. You purchase the car at the advertised price and then make monthly repayments on the principal of the car without any interest being applied to it.
However, while it may sound like a good deal, there are a number of things you should be aware of before committing to a 0% loan. Find out how a 0% car loan actually works and whether it might be right for you below.
How does a 0% car loan work?
Interest-free car loans are offered by dealership financiers and are generally used as a sales tactic. While you won't pay any interest on the loan, you may not actually be saving any money compared to a normal car loan. The dealer may be charging you a higher price for the car, or adding on extra fees and charges that end up costing you more than any interest repayments would. This will also generally be true of deals offering 1% finance, as the total cost of the loan may still be greater than a regular car finance option that charges a higher rate.
The 0-1% interest may also only be offered for a certain period of time, after which the loan reverts to a higher interest rate. You may also be required to make a large lump sum payment at the end of the loan, called a balloon payment, that will lower the size of your repayments but may be harder to budget for.
As with any financial product, it's important that you understand the terms and conditions of any 0% car loans you may be considering, and you should always compare a range of different loans to find the finance option that's right for you.
Here are the main points to keep in mind:
The purchase price of the car may be higher than normal and is usually non-negotiable.
You will likely be offered a lower price for any vehicle you want to trade in.
The loan structure (term, balloon payment) is likely to not be flexible.
You won't be charged interest for a set period of time.
The principal (the amount you borrow) may be lower due to a balloon payment, which will need to be paid at the end of the loan term.
Is 0% or 1% car finance cheaper than a regular car loan?
This depends. A 0-1% car loan won't necessarily cost less than a normal loan with a higher rate, as it may come with additional fees or costs, or charge you a high price for the car.
Interest-free car finance offers will also generally require you to make a larger balloon payment at the end of the loan term. This will reduce the size of your regular repayments but will need to be budgeted for throughout the loan term so that you have enough saved to cover the balloon payment when the time comes. By comparison, standard car loans will require you to pay more interest, but the repayments you make will be consistent and your debt should be paid off in full within the loan term, which may make it easier to budget for.
Where can I obtain a 0% car loan?
Car manufacturers may offer no-interest – or 0% car finance – deals through their dealerships in order to entice new business. It is very unlikely to find a traditional lender offering a car loan with a 0% or 1% interest rate.
Jump Payments Car Loans
Jump Payments Car Loans
Tailored finance options
No hard credit checks
100% confidential application
Jump Payments Car Loans
Apply completely online and access a range of lenders in a single application.
When it comes to car finance, there are a number of 0% loan options that may work in your favour. Consider the points below when comparing.
Added optional extras. While choosing your new car, you may be given the option of added extras such as alloy wheels, a leather interior or other luxury items. With a 0% car loan you may be able to roll the cost of these into the finance.
Capped price servicing. A 0% car loan from a dealership may also offer to add capped price dealer servicing into the cost of the loan. It's important to check this fact before signing a contract.
Higher loan amounts. Most banks and institutions limit the amount of money they will lend to you for a new car. With a 0% option and a deposit, you may be able to secure a higher loan amount.
Inflated cost. The price of the vehicle is almost certainly going to be higher than if you were to buy it with traditional financing. You can check this first by searching online for the average price of the car without the 0% p.a. interest before going to the dealership.
Large deposit. You are most likely going to be required to provide a significant amount of money down when you enter into this type of loan agreement.
Credit history. Typically, only borrowers with a pristine credit history will be considered for this type of financing.
Fees. Some manufacturers hide the cost of interest in monthly maintenance fees. Do the math. In some cases, this will still equal a very low rate loan, one that should still be considered.
High repayments. The manufacturer wants these types of loans paid off fast and will usually limit your loan term options. This will result in a higher monthly repayment for you.
No negotiating. There's not going to be any negotiating of the price of the car with this type of deal.
Trade-in value. Expect that the car you use as a trade-in will be drastically undervalued. In this scenario, you are better off taking the loan as is and selling your old car independently to get a fair price.
Before you lock yourself into this type of arrangement, you should always compare a range of loan products. While paying 0% or 1% interest on your car finance may seem the best option, this will not necessarily be the case and you may be able to save money by using a regular car loan.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
You'll receive a fixed or variable rate depending on the lender you are approved with Apply for up to $250,000 and use cash or trade in a vehicle to use as a deposit. Optional balloon payment available.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We compare from a wide set of banks, insurers and product issuers. We value our editorial independence and follow editorial guidelines.
finder.com.au has access to track details from the product issuers listed on our sites. Although we provide information on the products offered by a wide range of issuers, we don't cover every available product or service.
Please note that the information published on our site should not be construed as personal advice and does not consider your personal needs and circumstances. While our site will provide you with factual information and general advice to help you make better decisions, it isn't a substitute for professional advice. You should consider whether the products or services featured on our site are appropriate for your needs. If you're unsure about anything, seek professional advice before you apply for any product or commit to any plan.
Products marked as 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money here.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labelling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan, we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.