What Credit Score Is Needed to Buy a Car with 0% Interest?
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Almost everyone needs a car to get around. Unless you live in a big city with great public transit, there’s no other way to get to work, go to the store to buy groceries, or travel conveniently.
In July 2021 a new car cost, on average, $41,044. That’s more than most people can afford to pay out of pocket. That means most people will borrow money by getting a car loan. Depending on your credit score, you might be able to get an interest-free loan to buy a car.
What Credit Score Is Needed to Buy a Car with 0% Interest?
To qualify for zero-percent financing for anything, including a car, you need to have very good credit. What is a good credit score to buy a car with no interest? According to most lenders, you need a minimum credit score of 740.
The credit scoring scale ranges from a low of 300 to a high of 850, with scores above 670 being considered good. 740 is enough to land you in the very good range while you need a score of 800 or more to be considered an exceptional borrower.
In general, the better your credit score, the lower the interest rates of loans you qualify for. Bad credit means paying more interest and average credit makes it hard to get the best rates. You can only get the best auto loan deals with very good credit scores.
How Does a 0% APR Work?
A 0% APR loan works like any other loan, with the exception that you don’t have to pay any interest on the money you borrowed.
When you get a loan, you’ll get a bill each month. You have to make payments toward the loan each month until the loan is paid in full. With a traditional auto loan, each monthly payment covers the accrued interest plus a portion of the principal.
If you borrow $25,000 using a typical loan, you might wind up paying $28,000 over the course of the loan: $25,000 to repay the principal and $3,000 to cover the interest.
With a 0% APR loan, no interest accrues on the loan so all of the money you pay will go toward the principal. If you borrow $25,000 at 0% APR, you’ll pay exactly $25,000 over the life of the loan, assuming you don’t miss any payments.
You can easily calculate the monthly payment of a 0% APR loan. Just divide the amount you’re borrowing by the number of months you have to repay the loan.
If you borrow $25,000 and have a financing term of 60 months, the monthly car payment will be $25,000 / 60 = $416.67 per month.
Even though there’s no interest on a 0% APR loan, you still have to make payments by their due date. If you don’t, you‘ll face late fees and some loans include penalty APRs that go into effect if you miss payments.
How to Increase Your Credit Score to Qualify for a 0% Interest Car Loan
File a Dispute in Case of Inaccuracies
One of the first things that you should do when you’re trying to increase your FICO score is to request a copy of your credit history from each of the major credit bureaus. You might find that there are errors in your credit history that are dropping your score.
For example, you might find loans that don’t belong to you or payments incorrectly marked as late.
Each credit bureau has a process for disputing mistakes that are appearing in your credit history. These kinds of errors can have a major impact on your credit score, so getting them removed can turn an average credit score into a great one overnight.
Actively monitoring your credit report is a good way to nip these issues in the bud. If you notice mistakes you can get them fixed quickly. That will help you maintain excellent credit so you can appeal to an auto lender and secure the best auto loan rate possible.
Use CreditStrong
If you have poor credit, it can feel almost impossible to improve your credit history and build a good credit score. With bad credit, you’ll have trouble finding a lender to give you a loan and with no way to get a loan, you won’t have a way to build your credit.
CreditStrong offers credit builder loans. Credit builder loans are a special type of personal loan designed to help you improve your credit score.
When you apply for a loan, you choose a loan amount and term length. CreditStrong then sets the money you’ve borrowed aside in a savings account for you.
Each month, you’ll get a bill from CreditStrong. As you pay the bill, you’ll build your credit history. Once you’ve paid off the loan, CreditStrong will release the balance of the savings account to you.
You’ll wind up paying some interest and fees, but in the end, you’ll get a sum of cash and have better credit than when you started.
As a bonus, CreditStrong lets you cancel your loan at any time. That means that you won’t have to worry about missing payments, which can damage your credit score further.
Pay Your Bills on Time
The number one thing that a lender wants to know when you apply for car financing is whether you’ll repay the debt. That’s why your payment history is the most important thing when it comes to calculating your FICO auto score.
Each time you pay a bill before its due date, it improves your credit score slightly. Missing even one payment can have a major negative effect on your score that can take months or years to overcome.
Whenever you get a new credit card or loan, one of the best things that you can do is sign up for automatic payments.
Even if you only sign up to pay the minimum, this will make sure you never miss a loan payment and put you on the path toward excellent credit. You’ll still be free to pay more than the minimum if you’re able to pay the bill in full.
Once you have a loan, making your car loan payments on time is also essential. It will help you keep your credit report clean and make sure you don’t get hit with penalties.
Pay Down Any Credit Card Balances
Another important factor in calculating your credit score is your credit utilization ratio.
This ratio compares your total credit card balances with the credit limits on each of your credit cards. The closer you are to maxing out your credit cards, the worse your credit score will be.
Paying down your credit card balance will reduce your credit utilization ratio and help improve your FICO score. It also reduces the overall debt that shows up on your credit score, which will further boost your score.
You can also improve your credit score by paying down other loans, such as a student loan. The less debt that you have when applying for vehicle financing, the better your credit rating will be. That can make it easier to qualify for a vehicle loan at a lower interest rate.
Avoid Closing Any Old Credit Cards
The age of your credit also impacts your credit score. Lenders calculate your average credit account age when assessing your credit. The longer, the better.
People who have lots of new accounts and fewer old ones will have a worse credit score than someone with lots of older accounts and fewer new ones.
All in all, as long as there isn’t a fee for keeping the account open, you’re usually better off keeping old credit cards open.
Try Not to Apply for Any New Credit
Every car buyer should know that applying for new loans right before you apply for auto financing can lead to a higher interest rate on your loan.
Each new account you open will show up on your credit report and reduce the average age of your accounts, which will drop your credit score.
On top of that, the credit bureaus keep track of each time you apply for a loan. These “hard inquiries” remain on your credit report for two years and each report drops your credit score by a few points.
If you apply for new loans right before applying for an auto loan, it can tank your chances of landing a good financing deal.
Keep in mind that the credit scoring models do take into account a certain shopping time period. If your auto loan applications fall within 14 days, all of those hard inquiries count as one.
Things You Should Know About a 0% Interest Loan
0% interest loans are a great way for eligible borrowers to buy a car. They result in a lower monthly payment and help you save money in the long run. However, there are a few things to keep in mind before you apply for one.
These Are Only Available for New or Slightly Used Cars
For the most part, 0% APR deals are only available when you’re buying a new car or one that is very slightly used. Given the car market these days, buying a new car can be wildly expensive compared to buying a car that has been used for a few years.
It is often cheaper to get a used car that costs less money even if the car loan comes with interest. If you have good credit, you should still qualify for good financing terms.
Shorter Loan Terms
If you get a 0% interest car loan, you might find that the available terms are shorter than those for other financing plans.
For example, you might be able to get a 0% APR car loan with a term of four years or a car loan charging 1.99% APR and a term of seven years.
The 0% interest loan will be cheaper, but the shorter term means the monthly cost will be higher. Depending on your monthly budget, the financing plan that is more expensive in the long run might be more affordable.
Limited Selection of Cars
Some car sellers will offer 0% car loans to buyers, but only on select models of cars.
If you want to purchase one of these cars anyway, this isn’t a big deal, but if none of the cars you’re interested in qualify for a 0% APR car loan, you’ll have to choose a different car or live with paying interest.
Alternatives to 0% Financing
0% financing requires excellent credit. If you have bad credit or don’t want to deal with the drawbacks of 0% financing, you have lots of other options.
One is to get a conventional car loan from a credit union or bank. While subprime borrowers can expect to pay high interest rates, those with good credit can expect an average interest rate of 2% to 4%, which is relatively cheap.
You can also try to lease a car with bad credit if you struggle to qualify for any loan.
Should You Go For a 0% Interest Rate Loan If You Qualify?
If you qualify for a 0% interest rate auto loan and there’s one available for the car that you want to buy, it’s a great deal that can save you money in the long run.
However, if you have excellent credit, it doesn’t make sense to buy a more expensive car, or a car you don’t like, just to get a 0% interest loan.
The average auto loan rate is low enough that people with good credit will be able to get an affordable loan for almost any vehicle.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
