0% Financing Car Deals in Canada: Fact or Fiction?
There’s something about seeing those 0% financing offers in car commercials and internet ads that makes you think "free money!" Doesn’t 0% financing essentially mean you not only get a loan, but you don’t have to pay interest on that loan?
Technically yes, but like most too-good-to-be-true deals in life, it’s not that simple.
The offer of 0% financing is one of the most common in the auto industry for a reason. It entices the buyer like few other promotions can. The idea of getting great financing deals while making expensive vehicles seem more accessible seems very appealing. But what many don’t know is that while saving money on a vehicle with 0% financing is possible, it’s not easy to get approved for a vehicle at this rate. To qualify for a zero percent car loan you often need an excellent credit score, so if your credit history isn't looking too good your chances of qualifying for 0% is probably pretty slim. For those select few who do get approved, 0% financing still may not be worth it in the long run.
So before you sign on the dotted line, let’s pull back the curtain on 0% financing and see what’s really going on behind the scenes. And then let's talk about how you can find the best car deals near you and the best place to finance a car, with or without 0% APR. (APR stands for Annual Percentage Rate. It is the yearly interest rate charged on borrowed money, expressed as a percentage of the loan amount).
What does 0% car financing mean?
When you apply for auto financing, you agree to borrow money from a financial institution—either a bank, in-house financing at the dealership, or other lending institution—to help pay for the car loan. For this service, you will be charged an interest rate, which is a fee that you pay every month for the duration of the loan term, in addition to the principal sum of money borrowed.
Zero percent financing means that you can get approved for finance without having to pay any interest.
But why would any lender do that?
Well, it’s usually not the banks that offer this type of financing, but rather the automaker or new car dealership itself.
This financing incentive is beneficial to dealers and manufacturers because it helps them clear out old inventory and select models in order to make space for newer models. It can also spark sales of slow-selling vehicles.
If the dealer can motivate a vehicle purchase by forgoing the interest on your loan, they might calculate it makes good business sense in order to move inventory.
Furthermore, this typically happens when you have already qualified for a loan with a low APR, so the dealer has calculated that the amount they are covering is acceptable.
How can I get 0% financing on a car?
While the offer of 0% financing might be easy to find, your chances of actually getting that interest rate could be more elusive. Zero percent is commonly reserved for customers shopping for new cars with outstanding credit scores and great credit history.
New car dealerships that promote these 0% APR special offers don't usually specify that only buyers with great credit will get approved. That’s in the fine print. The reality is that automakers maintain strict applicant criteria that must be met before 0% financing is offered.
Having said that, qualifying for 0% car finance with imperfect credit is possible. Despite a lower credit score, applicants may get approved for special vehicle offers if they can prove that they can make their monthly payments in full for the duration of the term. Sometimes a co-signer, larger down payment, or collateral will be requested. It also helps if the customer has shown loyalty to the car brand.
If you walk into a dealership that has a special promotion and you find out you’re not eligible, don’t fret because 0% financing isn't the only offer worth pursuing. At any given time, there's plenty of value to be found in the new and pre-owned car market.
Is 0% car financing worth it?
As enticing as 0% financing sounds, it might not always be the best deal on offer. For example, a 0% interest loan is usually offered versus a cash rebate option, and the rebate option can often work out better for you, so make sure you have a calculator close by when you're considering your options. See the example below.
0% Finance vs. Cash Rebate
Steve wants to buy a car priced at $30,000. He applied and got approved with two different dealerships/lenders. With Option A, he got a financing rate of 5% and a cash bonus rebate of $5,000. With Option B, he was offered the 0% financing rate instead of the cash rebate.
In Option A, Steve will take the $5,000 cash rebate and pay $3,300 in interest on the $25,000 sum borrowed over the course of a 60-month term. He pays $28,300 altogether.
In Option B, he will take 0% APR, but he will have higher monthly payments without the cash rebate. Over 60 months, he will pay $30,000 altogether. Just the principal. There is no rebate or interest to calculate.
In this circumstance, the cash rebate works out better than 0% financing. If there's a trade-in or down payment, you should factor these into your calculations as well.
Furthermore, this example does not factor in car sales tax, but it's worth remembering that the rebate not only decreases the amount of interest you ultimately pay, but also how much tax you will pay on the total amount financed. If you have a trade in vehicle that can also decrease the amount of tax you need to pay as it lowers the total amount owed.
Other reasons why 0% finance might not be the best offer
While the 0% APR promotion is usually the most attractive at first glance, there are multiple reasons why you shouldn't jump at the first offer that comes along. Below are a few reasons why you might steer clear of a 0% financing offer:
Your options are limited
As we mentioned earlier, 0% financing is usually offered by dealers and manufacturers to clear out old stock or move under-selling vehicles. Sure, you’re getting a good deal, but you might not be getting the car that you actually want. Popular models or specific trims and features may not be included in a zero percent interest rate promotion while certain car brands such as luxury brands may never offer a 0% financing promotion.
You don't decide the term
It’s important to note that 0% financing offers typically don't let you choose the length of the term. You might only get 0% interest for a certain period before a higher interest rate kicks in. This abrupt change in monthly payments could be disruptive to your finances and it might encourage you to accept a shorter term. That’s not ideal if you were hoping for a longer term to keep monthly payments low. With 0% APR, you may have to provide a larger down payment to keep payments low and get the loan paid off before the higher rate kicks in.
No 0% financing on used cars
The 0% interest rate offer is utilized by many dealerships and manufacturers to move new vehicle inventory to make space for incoming models. For example, don’t be surprised to see 0% financing available on this year's models just when the latest models for next year are making their way to dealer lots and online shopping. In other words, pre-owned vehicles are not part of the equation. While there are many great deals to be found in the used car market, don’t expect to find this promotional offer available for used vehicles.
Other financing options for new and used cars
0% financing isn't the only option out there when it comes to financing a new car. There are several other popular financing options to consider:
1. Traditional Auto Loans
Description: A standard loan provided by banks, credit unions, or online lenders where you pay back the principal amount plus interest over a set term (usually 36, 48, or 60 months).
Pros: Flexible terms, competitive interest rates, and potential for negotiation.
Cons: Interest rates vary based on credit score, and longer terms can lead to higher overall interest costs.
Read how to get approved for a car loan with bad credit in Canada here.
2. Dealer Financing
Description: Financing arranged directly through the car dealership, often with promotional rates or special offers other than 0% financing, such as cash rebates.
Pros: Convenience, potential for special offers or incentives.
Cons: Interest rates might be higher than those available through banks or credit unions, and the dealership might not always offer the best terms.
3. Lease Financing
Description: Renting the car for a specified term (typically 24-36 months) with the option to buy at the end of the lease or return the car.
Pros: Lower monthly payments, the ability to drive a new car every few years, potential tax benefits.
Cons: Mileage limits, wear-and-tear charges, no ownership of the vehicle unless you choose to buy it at the end of the lease.
Read more: How to Lease a Car: Car Leasing in Canada Explained
4. Personal Loans
Description: Unsecured loans from banks, credit unions, or online lenders that can be used for any purpose, including buying a car.
Pros: Flexibility in how the funds are used, no collateral required.
Cons: Higher interest rates compared to secured auto loans, potential for higher monthly payments.
Read more: Auto Loans vs. Personal Loans
The best place to finance a car & get a great deal (without 0% car finance)
If 0% financing doesn’t work out for you, don’t lose heart. There are plenty of other ways to find the right car at the right price. Follow these tips to ensure you find the best possible deal with or without 0% financing.
1. Get pre-approved in minutes: Before you start looking at new cars, it's a good idea to find out firsthand what rate and deals you’re eligible for. Canada Drives can help you figure out what kind of financing you qualify for, even if you have bad credit. With a pre-approval in your back pocket, you’ll know exactly what vehicle options you're eligible for, saving you a lot of time and frustration.
Get pre-approved now
2. Shop pre-owned: There are fantastic deals to be found in the used car market regardless of 0% financing. The benefit of buying a used car from a dealership is that you know the car has been professionally inspected and serviced. Furthermore, car dealers and online vendors rely on repeat business, referrals, and online reviews. Therefore, you can be confident that you’re getting a reliable vehicle. Typically, you won’t enjoy the same value for money with a brand new car, or the same peace of mind when you buy a used car in a private sale.
3. Mark your calendar: Even if 0% financing offers are coming up short, look for special sale events like Employee Pricing, cash rebates, and other promotions. These events generally kick off in the late summer months alongside other promotional offers to clear lots and make space for next year’s models. But there are other opportune times to snag a deal, such as:
- towards the end of the year.
- towards the end of every month.
- during slower days at the dealership (i.e. weekdays).
- During the off-season for your vehicle type (i.e. shop for convertibles in October).
Read more about the best times to buy a car.
4. Work on your credit score: Traditionally, 0% financing is reserved for customers with the best credit scores. But that’s not always realistic for many potential car buyers. Fortunately for today's car buyer, you can get approved for great deals regardless of credit. But in the long run, it makes good financial sense to work towards improving your credit score. Fortunately, any car loan you get approved for today can help you start building credit for tomorrow.
Get pre-approved with Canada Drives
Zero percent financing isn't the only great car deal out there. The used car market is more robust then ever and a great place to find the best car deals; you just need to know where to look. Get pre-approved for a car loan today and Canada Drives will connect you with a dealership in your area who can get you a great deal on a vehicle you love!
