When you use any kind of finance, be that a bank loan, credit card or car finance, you’ll be charged interest calculated as a percentage of the total borrowing. This is usually expressed as an APR, or annual percentage rate. Quite simply, 0% car finance – sometimes referred to as zero percent car finance – means you won’t pay any interest.
Assuming there are no additional charges, that means if you borrow £20,000 to buy a car, you’ll pay back £20,000 over the course of the finance agreement period.
As with any finance agreement, make sure you read the fine print and understand every aspect of the deal.
The main advantage of 0% car finance is that the amount you borrow is the amount you’ll pay back. That means you might be able to buy a better or more well-equipped car because you’re not having to pay interest on top. Your money goes on the car, not to the lender.
However, 0% car finance is often only available on certain models, at certain times and for certain repayment periods. You might even find that only particular engines or trims fall under the offer. It’s also possible that the price of the vehicle might be inflated slightly to pay for the zero percent finance, or you might have extra fees and charges applied.
That said, 0% car finance deals are always worth seeking out if it means you can get the right car for your needs.
So an illustration, if you borrow £20,000 at 10% APR over five years, you’ll pay £420 per month – £25,242 in total. With 0% APR, it’ll cost you £333 per month – a total of £20,000.
That’s a £5242 saving.
For many car buyers, 0% APR car finance is appealing because it helps to keep the total cost of borrowing down. But it’s not for everyone, and depending on your credit rating, it may not be an option open to you.
That’s because the length of 0% car finance deals are sometimes restricted. You might find that your repayments will be over only two years, for example, and that may mean breaking your monthly budget because you’ll be paying more back sooner.
Also, finance lenders offering 0% APR deals are generally risk-averse, meaning that you may be declined if you don’t have a good credit score.
Car dealers or online retailers will be able to take you through the car finance process: showing you the exact sums involved, the amount you’re borrowing, and the amount you’ll be paying back. They’ll explain the finance agreement’s interest rates and other charges – and importantly, how much you’ll be paying per month and how much you’ll pay in total.
If you’re buying a car on a PCP deal, they will explain the cost of the initial deposit and the monthly repayments. They must also fully outline the size of your optional final payment, and all of the options open to you at the end of the agreement.
Much of the application process will be carried out online. You’ll need to supply some paperwork (see What documents will I need for 0% car finance?, below). It’s essential you understand precisely what you’re signing up for – ask if you’re not sure on something, and don’t be afraid to pause proceedings if you need some advice.
There are four main car finance options open to motorists:
- Hire purchase: This is the easiest to understand. You take the price of the car, deduct your deposit and the value of your part exchange (if you have one) to calculate the total amount to borrow. The monthly repayments are divided into equal amounts, like a pizza. Once you’ve made the final payment, the car is yours – but because of this, the monthly payments can be higher than on a PCP agreement.
- Personal contract purchase (PCP): This option can provide the lowest monthly payments, making it among the most popular finance options. Motorists pay an initial deposit, usually around 10% of the car’s total price, followed by monthly payments that usually last between three and five years. At the end of the agreement, there are three options: hand the car back and walk away, use the car as the deposit on your next purchase, or make a large ‘optional final payment’, also known as a balloon payment, to keep the car.
- Personal loans: These are available from banks, building societies, and other finance lenders. You borrow an amount, pay the dealer, and then repay the loan directly to the lender.
- Leasing: This can be viewed as long-term rental. You usually pay several months' rent up front, followed by regular payments until the end of the agreement. At that point, you hand the car back.
It’s critical that you fully understand all aspects of any finance deal you sign up for.
You can read more about hire purchase vs PCP, the pros and cons of car leasing, and everything you need to know about personal loans in our advice guides.
Typically, you’ll only get 0% APR car finance if a car manufacturer is offering it, but there are still a number of options available to you.
To get low APR on car finance, first hunt around for the lowest advertised APR deals. If you’re not happy with the interest rate offered by a dealer, there are plenty of online lenders who could help reduce the APR you’ll pay – just make sure you read and understand what you’re signing up for.
A good credit score is key to getting a low APR rate, because the lower the risk lenders think you represent, the lower the cost of borrowing. Use an online credit check service from a provider such as Experian to check yours. If it’s anything less than good, you could struggle, but quick fixes include ensuring you’re on the Electoral Register, closing unused bank accounts and credit cards, and making sure you pay any existing credit agreements on time, every month.
APR, or annual percentage rate, is the rate used to help understand the cost of your borrowing. It incorporates the interest rate and additional charges, is expressed as a percentage of the total amount borrowed – and lenders must tell you what it is before you sign.
In short, the higher the percentage, the more you’ll pay to borrow that sum of money. Zero percent APR is cheaper than 5%; 10% is cheaper than 15%.
Confusingly, you may see two kinds of APR expressed. Representative APR is often shown in advertising, and is the rate that at least 51% of their customers get, and as such is an estimate. Personal APR is the actual rate you’ll pay, taking into account your own personal – and credit – circ*mstances.
Generally speaking, 0% finance is only available on new cars, because the deals are mostly bankrolled by the car manufacturer – so in effect the manufacturer is footing the cost of the real interest rate, so you don’t have to.
Used car profit margins are often tighter, and many used-car dealers have a looser relationship with car manufacturers. Where you do find 0% used car finance deals, you might discover the screen price has been increased to fund the reduction in interest rate.
The most credible alternatives to zero percent car finance are related to making a cash payment. If you have savings, you could use that, or you could consider borrowing the money from a friend or family member.
But even then, a 0% APR deal will make more sense for many, because using your savings means you’ll miss out on the interest you’d receive if you kept it in the bank.
Cars available with 0% finance change all the time, but they’re usually available on models where there’s more supply than demand. Deals on the UK’s most popular new cars can be a little harder to come by.
While you could visit the offers section of each new-car manufacturer’s website, What Car?’s 0% APR car finance deals section lists the keenest deals – and is continually updated.
If you’re buying a new car, or a used car from a dealer or online retailer, the application process should be taken care of, although you will need to show certain documentation. This will typically include:
- Proof of identity, such as a valid driving licence or passport
- Proof of income, such as a payslip or a bank statement if you are self-employed
- Proof of address, such as a utility bill, bank statement or council tax bill. You may need to provide details of previous addresses if you’ve moved house in the last few years.
- Your bank details to allow the finance lender to collect payments
It’s worth carrying out your own credit check before you start this process, because 0% car finance deals may only be available to those with a good credit score. Experian is one respected provider of these services.
To get the best 0% car finance deal, you’ll need to first choose the best car for your needs. Our expert team of reviewers have tested every new car on sale, delivering the verdict on what it’s really like, and the version that you should choose.
Once you’ve drawn up your shortlist, search through the best 0% car finance deals on What Car? to get a complete view of the entire new car market.
Then contact dealers, ask them to give the best price on your part exchange and see if they can match – or better – our Target Price. Only once you’re happy should you sign on the dotted line.
