Car finance: what is interest-free credit?

High interest rates increase your monthly car payments, but with interest-free credit there’s no interest to pay

Christofer Lloyd
May 31, 2019

You may be used to interest-free credit when buying a sofa, but it can be available when financing a car, too. Typically interest-free credit - also known as 0% APR - is available on new cars, and means that you’re not being charged for the privilege of borrowing the money.

While a normal car finance contract sees interest added to the total amount you pay back - so the more you borrow and the longer the contract, the more interest you pay - interest-free credit means you simply pay back the amount you borrow and nothing more.

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Is interest-free credit car finance a good deal?

In theory, interest-free credit is the holy grail - you get to pay for the car you want in affordable chunks with no interest added - it’s not always the best deal for you.

That’s because you may be able to get additional list price savings or deposit contribution finance discounts by opting for a different deal. This means that it’s always worth shopping around for the car you want and getting like-for-like finance quotes to establish which deal gives you the lowest monthly costs and will cost you least overall.

Large deposit contribution discounts can outweigh interest charges

It’s not unusual for new car finance deals to feature deposit contribution discounts large enough to more than outweigh the interest charged. Even some £11,000 city cars can be available with deposit contributions of £1,750, with interest charges amounting to just £1,000 on a four-year contract - assuming 4.9% APR in this case.

While an interest-free credit option would cost you nothing in interest charges, the 4.9% APR choice could actually save you around £750, with the finance discount outweighing the interest charged. If in doubt, ask the dealer to provide like-for-like quotes for all the options available, so you can see which one will save you money.

Interest-free credit with deposit contribution finance savings

In some cases, however, you can take advantage of interest-free credit and large deposit contributions. These offers are typically very good value, as you benefit from a discount on the cash price and don’t have to pay interest.

More expensive cars often come with low interest charges plus savings and it’s not unusual to find interest-free credit plus an £11,000 deposit contribution discount on a £70,000 luxury car.

Just check there aren’t even bigger cash discounts available. Any car that has interest-free credit plus additional savings is likely to be available with large cash discounts.

You may need to put down a minimum deposit to get interest-free credit

Where several finance offers are available on the same car, you may have to put down a minimum deposit to secure the interest-free credit option or stick to a shorter contract.

That’s not always the case, however, and some cars are available with interest-free credit and no deposit, so you don’t have to have lots of cash to hand to benefit from no added interest.

Interest-free credit rarely available on used cars

On the other hand, interest-free credit is normally only available on new cars, with the cost of interest being effectively subsidised by the manufacturer as a form of discount.

While some dealers do offer interest-free credit, it’s wise to compare the cash price of the car, as one way to claw back the lost income from interest is by bumping up the initial price. If that’s the case, your payments will be no lower with the interest-free credit finance than on an equivalent car with a lower cash price.


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