Free financing is the best discount on a new car

Percentage sign on car windshield

The best auto loan is a free auto loan.

“An interest-free loan is a great offer,” says Jack Nerad, executive analyst at Kelley Blue Book.

So if you can qualify for 0% interest on a new car or truck, don't hesitate to take it.

The average 3-, 4- and 5-year new-car loans cost around 4%. These are near record-low interest rates, according to our most recent surveys of major banks and finance companies.

But if you can find a promotional rate at 2.6% or 1.9%, that’s even better. And paying no interest at all is the ultimate deal.

With used-car prices high and used-car loans averaging around 4.5%, free financing could make the monthly payments on a new ride lower than those for a late-model used car.

Why would anyone let you borrow money for free?

Automakers will subsidize the cost of loans to provide a much lower, discounted interest rate on models they're anxious to move off dealer lots.

Savvy shoppers can score a low sticker price and good loan terms on these models.

"Negotiate your best deal possible, then focus on getting the best financing," says Todd Tresidder, founder and financial coach at FinancialMentor.com.

Here's where you'll find all of the discount loans, rebates and lease deals currently offered by the major brands.

Then use an auto loan calculator to see how much you could save.

Let's say you finance $25,000 on a car for four years at 0%. You'll pay $521 a month for a total of $25,000. If you finance that same $25,000 at 4%, you'll pay $564 month and a total of $27,095 over the four years of the loan.

That's $2,095 in interest you won’t have to pay with 0% financing.

Even if you were going to pay cash, it makes sense to take advantage of 0% financing.

Use the lender's $25,000 for free while earning interest on your $25,000 through savings or investment. If all you did was put that $25,000 into a CD that pays a measly 1%, it would earn $1,015 during the 48 months you were paying off the car loan.

Or let's say you were thinking about buying a late-model used car or truck.

For the same $521 monthly payment, you could borrow $17,514 at 4.5% for three years — the typical cost and term of a used-car loan — or about $25,000 with a 48-month new-car loan at 0%.

That's an opportunity you ought to consider.

Many times automakers will offer you a choice between a cut-rate loan and a cash rebate.

“You have to compare the 0% loan with the rebate cash and standard loan, because interest rates are pretty low," Nerad says.

Let's say the dealer offers this choice: $2,000 cash rebate or free financing on a full-size sedan that costs $29,000.

With the discount loan, a 10% down payment of $2,900 would leave a balance to be financed of $26,100, and that's how much you would spend on a 60-month loan since you'd pay no interest. If you took the hefty $2,000 rebate, deducted it from the balance and financed the remaining $24,100 over five years at 4.04% — the current national average — you'd wind up paying $26,656.

The discount financing is worth $556 more than the rebate.

A 0% loan will trump all but the most humongous rebates.

Use our Rebate vs. low-cost loan calculator to figure exactly which discount saves the most.

The call is much closer when you're offered discount financing that's not as generous as 0% and you're buying a less expensive vehicle.

Let's say the choice is between $1,000 cash back or 2.9% financing on a pickup that costs $21,700:

Opt for the discounted rate with a $4,500 down payment (approximately 20%), and you’d be financing $17,200. At 2.9%, that’s a total of $18,498 over 60 months. Choose the $1,000 cash rebate, use it to reduce the amount loan amount to $16,200 and a 4.04% loan would cost $17,918.

Here, the advantage lies with taking the rebate, but by only a few hundred dollars.

The big hurdle to obtaining an interest-free loan is qualifying for one.

Promotional low-cost loans are only available through the financing companies owned by or affiliated with the manufacturer offering the deal, such as Ford Motor Credit or Toyota Financial Services.

They offer no hard-and-fast rules for how low credit scores can be and still win approval. But if you have below-average credit (a credit score of 670 or less), don't be shocked if you're turned down.

As Honda constantly repeats in all of its ads for cut-rate financing that it's only available "for well-qualified buyers."

Even if you qualify for a promotional loan, make sure you can afford the payments. Use our tips to know how much you should spend on a car so you don’t end up with a loan that’s too big for your wallet.

Also, use our extensive database of auto loan rates to compare deals from dozens of banks and finance companies.

  • Jalen

    New data from R.L. Polk show that improved quality of cars couple with the ongoing economic ills means that people are holding on to their cars longer. Polk says people are keeping vehicles they bought new nearly 6 years and ones they bought used an average of 4 years.

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