What Is 0% Car Finance And How Does It Work?

An interest-free loan – it almost sounds too good to be true, right?
If you’ve been dreaming of buying a car on finance but hate the idea of paying interest, you might be in luck.
Yes, 0% car finance does exist.
But it’s not the right choice for everyone and it’s not commonly available. Of the few 0% car finance deals out there on the market currently, the majority of them will be for a limited time only so it’s worth checking the details before getting too excited.
The terms and conditions and extra charges that can come with this type of finance might mean that a traditional hire purchase (HP) or personal contract purchase (PCP) loan with an affordable rate of interest could be a better deal for you. It all depends on your individual circumstances.
Let’s break down the main things to consider when contemplating 0% interest car finance.

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What is 0% car finance?

When a lender agrees to let you borrow the money to buy a car, they usually ask you to pay interest in return. 0% car finance is the exception to this rule.
With a 0% interest loan, you’ll still be able to spread the cost of your new car into manageable monthly payments but there won’t be any interest due.

How does it work?

0% car finance isn’t available everywhere. In fact, most car manufacturers and finance providers will use it as a promotional tool to encourage customers to step onto the forecourt. That’s why it’s often only offered for a limited time or on car models that are less popular.
You’ll generally need to have a good or excellent credit score to qualify for a 0% loan. If you’re eligible, you can take out a hire purchase (HP) or personal contract purchase (PCP) finance agreement to spread the cost of your car over a period of between one to six years.
Each month you’ll make a fixed repayment, until the car’s purchase price is fully paid off. You won’t need to pay any interest during the loan term (unless the 0% interest rate is limited to the first year, for example), but you’ll likely need to cover add-on fees and extra admin charges.

Can I get 0% car finance on new and used cars?

While 0% car finance deals are sometimes offered on used cars, they are most commonly available on brand-new vehicles that have just rolled off the factory production line.
Manufacturers may offer zero interest on models they want to sell quickly. This might be restricted to vehicles in more unusual colours or with modifications that don’t have wide appeal. So, if you don’t mind taking home a lime green car with a loud turbo exhaust, you might be in luck!
If you do find a used car offered with a 0% interest loan, do your due diligence before signing on the dotted line. Check the full terms and conditions and the market rate for that model as you may find that the interest free rate doesn’t make up for a potentially inflated price tag.

What are the advantages and disadvantages of 0% car finance?

While paying no interest on a car loan might sound like a win/win situation, there are several pros and cons of 0% car finance to consider before you commit:


Pros of 0% finance

  • You could spend less overall as you won’t need to pay any interest on the loan
  • You’ll only need to pay the purchase price of your car
  • You might have lower repayments thanks to the lack of interest
  • You may be able to afford a better or higher spec car
  • 0% finance can be available with both HP and PCP deals

Cons of 0% finance

  • These loans are often only available to people with good or excellent credit scores
  • You might need to put down a large deposit upfront
  • It may not be available on used cars or highly sought-after models
  • The car’s purchase price might be inflated
  • You might face restrictions on the loan term and finance deals available

Can I get a 0% deal with bad credit?

There are a whole host of reasons why you might have a bad credit score. Maybe you’ve missed payments in the past, had a debt management solution like an IVA, or been financially linked with someone with a poor credit score.
If this sounds like you, it might be difficult for you to get a 0% finance deal. These are typically restricted to borrowers with good or excellent credit scores.
When applying for a loan, you may be able to check your eligibility by getting a quote first. This will typically include a soft credit check, which shouldn’t impact your credit score, but can allow a lender to determine whether you qualify for a loan.
Don’t panic if you can’t secure a 0% deal with bad credit; you may still be eligible for a car finance deal with a rate that’s affordable for your circumstances.

Are there additional costs involved?

Before deciding if a 0% interest car finance deal is right for you, weigh up the pros and cons. Here’s a rundown of the main benefits and downsides of these types of deals:

While you won’t have to pay interest during your 0% finance period, additional costs and charges can still apply.
The first thing to be aware of is that the principal cost of your new car could be inflated. This is one way that dealerships and lenders can recoup the lost interest.
If you’re concerned that you might be paying over the odds for a car, compare it with models of a similar age and condition that aren’t offered with zero interest. When you do the calculations, you might find that the savings you make on interest don’t justify the higher purchase price.
Fees and charges may also apply. Not only will you likely face penalties if you make a late payment, but you may also have to pay admin charges.
It’s also worth keeping in mind that, if the 0% rate only applies for a set period, you might have to pay a higher rate of interest on the remaining loan.

FAQs About 0% Interest Car Finance:

How can I spot a good 0% car finance deal?

While 0% interest might seem like a great car finance deal on the surface, you might want to dig a little deeper to determine whether it’s right for you.
Here are a few of the signs of a good 0% offer:

  • Flexible loan length – you’ll have the choice to have a short or longer loan term based on your circumstances.
  • Honest pricing – the car will be priced similarly to other models on the market of the same age and condition
  • No hidden fees – if any charges do apply, these will be shared upfront, so you know exactly where you stand.
  • Reasonable annual mileage limit – if a mileage limit applies, it will be reasonable and appropriate for your typical driving habits.
  • Fair wear and tear policy – the lender isn’t expecting the car to be kept in pristine condition if you return it at the end of your PCP agreement.
  • Accessible customer support – there’s an easy way to contact the team so you can have any issues resolved quickly.
  • Positive reviews – the dealership and lender have received generally positive feedback from other customers.

How do finance companies make money on 0% interest?

Interest is usually how the finance companies make money when lending, so what do they do when no interest is charged?
There are a few different ways that the lender may take a cut in this type of finance deal:

  • Inflated prices – you may find that the car purchase price is higher than similar models not offered with 0% finance.
  • 0% for limited time – if the offer only lasts for part of the loan term, the lender will collect interest for the remaining months or years.
  • Penalties and fees – if the borrower is falling behind with their payments or makes late payments regularly, penalty charges might apply.

Will 0% car finance hurt my credit score?

While credit reference agencies keep their calculations a closely guarded secret, one thing that they don’t consider when creating your credit score is the loan interest rate. That means having a 0% loan on your report shouldn’t have any direct impact on your credit score.
However, when you take out finance, you’ll be adding a new account to your credit file and a new hard search. This can affect the overall age of your credit and your credit utilisation. These changes may mean that you’ll see your credit score dip for a while, but it should recover quickly once you start making your repayments on time. In fact, your new loan could even improve your score over time.