What You Should Know About 0% Car Loans

Wondering what 0% car finance is? Find out how it works and what you should look out for with Savvy.
Published on December 3rd, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas


Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Ever hear the phrase “too good to be true?” It can often apply to the world of car financing, especially with tempting offers like 0% interest car finance. These deals may sound like a steal, but it’s important to know that there's more to the story before you sign on the dotted line. Find out more about how 0% car finance works and learn about its potential drawbacks right here with Savvy.

What are 0% car loans and how do they work?

0% car loans, also known as zero percent, interest-free or no interest car finance, are a financing option where borrowers can purchase a vehicle without paying any interest on the car loan. In essence, the borrower only repays the principal amount borrowed, with no additional interest charges added to the loan.

This type of financing arrangement is typically used as a promotional offer to attract customers and stimulate car sales. It's important to note that not all borrowers may qualify for 0% finance, as eligibility criteria such as creditworthiness and loan term may apply. Additionally, these offers may only be available for specific car models or during certain promotional periods.

While 0% finance can seem like an attractive option, it's essential for borrowers to carefully review the terms and conditions of the offer. In many cases, the price of the car you’re buying may be inflated beyond what it otherwise would cost to account for the interest you would’ve otherwise paid. There are other ways that 0% offers can end up costing you the same or more money as a regular loan, which are outlined below.

Where can I get a 0% car finance deal from?

Unlike traditional car loans offered by various banks and online lenders, 0% car finance typically isn’t offered directly by financial institutions. Instead, it's a promotional offer provided by the car manufacturer or dealership themselves. Here's how it works:

  • Car manufacturers: car manufacturers can use their in-house financing companies to offer 0% car finance deals on specific models or during promotional periods.
  • Dealerships: many independent dealerships may offer 0% financing, but they may partner with specific lenders who offer them special rates for these promotions. These deals are often on used cars or specific models with slower sales.

What should I consider before taking out a 0% car loan?

There’s a range of factors to consider before applying for a 0% car loan through your dealership. These include:

  • Inflated cost of car purchase: while a 0% finance deal may sound enticing, some dealerships may offset the absence of interest by inflating the purchase price of the vehicle (as mentioned earlier). Carefully review the total cost of the vehicle to ensure that it remains competitive compared to other financing options.
  • Short interest-free terms: 0% car finance deals often come with interest-free periods that only last for a limited time, rather than the whole term. This means your loan could revert to a higher interest rate once this period is completed (often after 12 or so months), costing you more overall.
  • Mandatory balloon payments: many 0% car finance deals, like other types of dealer finance, may require borrowers to make a balloon payment at the end of the loan term. A balloon payment is a large lump sum payment that covers the remaining balance of the loan based on the residual value set by your dealership. These can decrease the cost of your monthly payments but will increase the overall cost of your loan.
  • Potential for decreased car trade-in value: opting for a 0% car finance deal may limit your ability to negotiate on the purchase price of the vehicle compared to what you may be able to do otherwise. Additionally, some dealerships may offer less favourable trade-in deals for vehicles financed through 0% finance arrangements. Consider the potential impact on the trade-in value of your car when choosing a financing option.
  • Fees included in your loan agreement: even with a 0% finance deal, borrowers are likely to still incur fees and charges associated with the loan agreement. These could include administration fees, origination fees or early repayment penalties. Review the loan agreement carefully and ask the lender or dealership about any fees included in the financing arrangement to avoid unexpected costs down the line.

What are the alternatives to 0% car finance when purchasing my vehicle?

The most common alternative to a 0% car loan is seeking out a traditional car loan with a lender. Although these do come with interest, carefully considering the options at your disposal may result in a more favourable deal for your needs, according to Savvy Managing Director Bill Tsouvalas.

“Taking out car finance through your dealership could mean you’re missing out on a wide range of better options on the market”, he said.

“The key to securing the best available car loan deal for your needs is comparing as many offers, lenders and loans as possible before you apply.

“By doing that, you can have more confidence that you’re getting the most suitable deal on offer to you.”

Bill Tsouvalas, Managing Director - Savvy

If you’re looking at securing a car loan with lower interest, there are also several tips you can follow to improve your chances of a better rate:

  1. Work on improving your credit score, such as paying off any existing debts, continuing to make payments on time and reducing your available credit (such as lowering your credit card limits).
  2. Although making a larger deposit may not impact your rate, it can significantly lower the overall cost of interest on your loan. The same applies to selecting a shorter loan term.
  3. If your record isn’t the best, applying with a cosigner such as a parent with a strong credit record could improve your chances of locking in a good rate.
  4. You may also be able to negotiate with certain lenders to see if they’re able to offer you a better deal which is more suited to your credit profile.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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