0% APR car finance

Monthly car payments without a catch? 0% APR car finance can offer a great deal, but see our guide for the potential pitfalls

BuyaCar team
Aug 30, 2018

Find a 0% APR car deal and finance should be free. Once you have made all of your repayments, you should have paid no more than if you had bought the car in cash.

These deals carry no interest or fee charges, and are mostly available for new cars. Availability does vary, but if the offer is there, you may be better-off opting for 0% APR finance than buying the car outright because it offers more flexibility.

You’ll often need to pay a sizeable deposit, but the rest of the money won’t be tied up in a car: the cash you’d have spent on a vehicle can be earning interest or invested elsewhere. Taking out finance can also make a better, or more suitable, car affordable if it’s beyond your cash budget.

If you’re only planning to keep a car for a few years, then Personal Contract Purchase (PCP) finance makes it easy to return the car at the end and walk away, although this can be poor value. You’re often better off trading the car in or selling it yourself. If you change your mind, you can also buy it.

Despite the benefits of 0% APR finance, it’s always worth comparing your other options, which can work out cheaper. For example, it’s not always available with other discounts, which are offered to cash buyers or to customers taking out finance where interest is charged.


0% APR finance for used cars

This type of offer is less common for used cars, which aren’t as heavily supported by incentives from car manufacturers.

Some 0% APR deals inflate the overall cost of the car, so you might not be paying interest, but you’re still paying more than the vehicle is worth. This is also the case with Islamic car finance.

Cheap finance, with a low APR rate is still available for used cars. These are normally cheaper than buying a new car with 0% APR finance. Every nearly-new and used car on BuyaCar includes an example of finance repayments to give an idea of the monthly cost.


0% APR finance: how it works

APR stands for annual percentage rate and is a standard way of calculating the full cost of finance. It takes into account the interest charged on debt, as well as any fees. This makes it easy to compare the cost of finance between different providers.

If finance is advertised as 0% APR, then it’s excellent news because you won’t be charged any interest or fees. This should mean that the overall amount you pay is no greater than if you had bought upfront in cash.

However, it doesn’t take into account the discounts available elsewhere. A 0% APR financed deal may not include any discounts, so you’ll repay the full cost of the car, as advertised in the brochure.

In that scenario, cash buyers may be offered a discount off the price, making the car cheaper. The biggest discounts are typically offered to customers who opt for finance where interest is charged. If you can repay quickly, then this can work out to be the cheapest option overall.


Types of 0% APR finance finance

Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements are the most popular types of car finance in Britain and you’ll find 0% APR offers for both.

PCP offers the lowest monthly payments and greatest flexibility because you only repay part of the car’s cost - the value that it’s expected to lose during the agreement.

At the end, you’re able to return the car with nothing more to pay. Alternatively, you can pay the remainder of its cost and own the vehicle. This amount can also be refinanced.

When the car is worth more than the final payment, then trading it in or selling it will result in some money being left over once the finance has been settled. This can be returned to you or used as a deposit towards another car.

A Hire Purchase agreement involves higher monthly instalments because the car becomes yours, with nothing more due once the final payment is made.


Requirements for 0% APR finance

Many 0% APR deals require a large deposit. This is to ensure that the lender gets their money back if the customer misses payments close to the start of the agreement.

Lenders increase interest rates for customers with poor credit ratings, as they are seen to be at higher risk of defaulting on their payments.

This means that the lowest 0% APR rates are often only available to buyers with a good credit score.


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