How to Get an Interest-Free Car Loan

Interest-free loans for new vehicles sometimes have hidden costs.

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If you're interested in borrowing money to buy a car without paying interest, you can. But the only way to get a truly interest-free car loan is to pretend you don’t need one.

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Typically interest-free car loan programs are offered to people who buy new cars and especially those with good credit score ratings. But if the car company jacks up the price of the car to offset the loan, you’re really not getting an interest-free loan.

I often hear commercials advertising cars for sale at zero percent interest or a 10 percent discount. For example, say you can buy a car for $20,000 if you pay cash or $22,000 with zero interest. But if you choose the latter option, you aren’t really getting zero interest. The interest is the $2,000, which is the difference between the cash price and the financed price.

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If you decide to buy a new car, ask what the price is if you pay in cash today. If they don’t automatically offer a cash price discount, ask for one. After you get a specific figure, then inquire about the interest-free car loan program to see if the loan amount is for the same price. If they don’t stick to the original price, begin to walk out of the showroom and do not look back.

One of three things will then happen. The first possibility is that the salesperson will make the deal. The salesperson could also offer a compromise and you can decide to either accept or reject their offer. Assuming the offer is an improvement on the all cash deal, you've already improved your situation. The third possibility is that the salesperson watches you drive off and waits for the next showroom visitor.

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Using this technique, you may end up with an interest-free car loan or, if not, at least a much better price on the car. One final tip: It's always important to know your credit score before you make a major purchase. By presenting yourself as a low risk to the dealership, you make it easier for them to reduce or eliminate the interest cost.

The only way to truly get an interest-free car loan is if you know what the cash price is and get that same cash price spread out over a period of months or years.

Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.