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Zero Percent Car Finance Explained

Zero percent (0%) car finance or low interest car loans are subject to large deposits, short loan terms, large final lump-sum payments and strict lending criteria. Understand how a subvented car loan works.

The low down on Interest Free Car Loans.

Zero percent (0%) car finance and low interest rates of 0.9%, 1.9% & 2.9% are designed to generate sales to move the metal through car dealerships.

Manufacturer’s used no interest or low interest loans prolifically post-GFC to reduce growing inventories during a difficult sales period. However we still see heavily subsidised car finance being offered today to entice car buyers to firstly put their brand on the shopping list and then to consider upgrading to a new vehicle, and potentially purchase a slow moving model or one that is about to be replaced by a newer version.

Unfortunately, despite the appeal of a zero percent deal, once you get into the dealership and start to make enquiries, you soon realise that these special offers come with a number of conditions including large upfront deposits, short loan terms, large final lump-sum payments, strict lending criteria, restricted choice of vehicle and limited opportunities to negotiate the price of the car or the value of your trade-in.

No interest car loans are typically offered by the lending divisions of the car manufacturers which are otherwise referred to as “captive finance companies”. For instance, Toyota Motor Corporation Australia uses Toyota Finance Australia to lend money to car buyers who want to drive a Toyota and works with Toyota Finance to structure low interest loans. Each carmaker has its own captive lender whose role it is to support the sales of the vehicle manufacturer.

The car companies use the low rate interest financing to attract buyers to their brand, and they make the profit on the cars rather than on finance charges. This doesn’t mean you have to get a loan from the captive finance company — car dealers are happy to accept money from any financial institution — but this is where you can often find the lowest rates – because they are subsidised or otherwise known as subvented interest rates.


What is a subvented interest rate car loan?

The No Interest or Low Interest being advertised for a car loan is legitimate and is referred to within the industry as a ‘subvented’ interest rate where the interest rate for the finance package is being subsidised by the manufacturer, or car dealer, out of the profit made on the sale of the car.

Car manufacturers generally arrange a ‘subvention‘ finance program for specific models via their captive finance company as a tool to promote sales.

A subvention finance program generally does not cost the finance company making the low interest offer. This is because the loss of interest to the car loan company is subsidised, or offset, by the manufacturer or car dealership and remitted to the finance company within 90 days of the vehicle purchase. The subsidy amount is generally accrued by not discounting the sale price of the vehicle, or restricting any discount, so that enough profit can be retained to pay to the car loan company the value of the subsidy. This means the vehicle price may not be negotiable, or it can only be discounted to a certain value if you were taking up the low interest finance offer.


0% finance (zero percent) - Wikipedia

Subvention means the provision of assistance or financial support.


Should I consider a zero interest or low interest car loan?

The short answer is yes but be cautious, do your homework and understand the programs limitations. Paying no interest on a new car loan may sound almost impossible. But it is possible for people with very strong credit. And it’s something you should definitely consider, because over the life of the loan it can save you hundreds of dollars. But you should be aware of the pro’s and con’s of zero interest car finance.

Whilst you may qualify for a zero interest or low interest car loan, you may not want the added pressure of the resultant higher loan repayments and other loan conditions such as a final lump-sum payment at the end of the term.

It’s probably no surprise that carmakers only offer 0% interest or low rate financing on specific models, using specific loan structures with 2 or 3 year loan terms and some form of a final lump-sum payment.

As a result, in order to qualify for these deals, car buyers need to be able to demonstrate a strong ability to service the higher loan repayments, coupled with a high credit score and a long credit history.

Responsible lending obligations require car finance companies to be vigilant when assessing loan applications and, in particular, determining that a consumer can meet their financial obligations without financial hardship. Therefore significant credit hurdles must be satisfied to meet the higher loan repayments on a zero percent car loan.

If you haven’t done so recently, check your credit score to see if you meet the lender’s requirements. If you’re unsure about how the finance incentive works, or whether it’s still available, try calling the Business Manager at the car dealership for some information. But be prepared — often the finance manager will urge you to come to the dealership in person or encourage you to remotely fill out a privacy act consent and basic credit application in order for the car dealership to request your credit report to see if you qualify.

Bait and switch?

0% finance isn't a scam

While 0% financing isn't a scam, some car buyers have suggested that zero percent car financing is a “bait and switch” tactic used by the automotive industry. The manufacturer or dealer advertises low rates to attract shoppers, gets them hooked on a car, then apologetically informs them that they don’t qualify for the 0% special.

Even if you don’t qualify for 0% car financing, you might still get a below-market interest rate.

This might be true in some cases, but if you own or are buying your home, have a demonstrated good credit history, and understand the terms of the incentive, most dealers will give you the advertised offer so they can sell another car. In those cases where you fall just short of 0% financing, there might still be below-market rates available at the dealership. So, instead of paying 0%, you might qualify for a below ‘normal’ interest rate deal.

If you’re uncertain if you’ll meet the lending requirements for 0% financing, it’s smart to get preapproved for an auto loan before you go to the dealership. Once you know your preapproved interest rate, the dealer will be eager to undercut that rate to get you to finance with them.


Pro's & Con's of Zero Percent Car Finance

Zero percent car finance sounds very compelling but be sure to do your homework before signing a buyers order form. Here are some of the pro’s and con’s of low interest car loans that you should consider:


  • Increased Purchasing Power: A 0% car loan combined with a deposit or large balloon repayment may enable you to secure a higher loan amount and purchase an upgraded model.
  • Added Optional Extras: When you are choosing your new car there may be options available such as alloy wheels, leather interior or other luxury items. With a 0% car loan you may be able to roll the cost of these into the finance.
  • Fixed Price Servicing: With a 0 percent car loan from a dealership, you may be able to get a bonus of fixed price dealer servicing into the cost of the loan. It's important to check this fact before signing a contract.



  • Inflated Retail Price: The price of the vehicle is almost certainly going to be higher than if you were to buy it with traditional financing. You can check this first by searching online for the average price of the car without the 0% p.a. interest before going to the dealership.
  • No Price Negotiation: There is not going to be any negotiating the price of the car when you are getting this type of deal.
  • Trade-in Value: Expect that the car you use as a trade-in will be drastically undervalued. In this scenario, you are better off to take the loan as is and sell your old car privately to get a better price. It’s also an idea to have your car independently valued so you know the opportunity cost.
  • Large Deposit: Whilst some car companies do offer no deposit options for 0% finance, most deals are likely going to required a significant deposit when you enter into the terms for a subvented car loan.
  • High Loan Repayments: Shorter loan terms help to reduce the total exposure a car company has to these type of loans but increases the monthly loan repayment. It also limits the number of consumers that will qualify for the higher loan repayments.
  • Credit History: Typically, only borrowers with an excellent credit history will be considered for this type of vehicle financing.
  • Limited Research: As many people are so focused on rate, proper research is not done, or they have got caught up in the moment of the test drive and excitement of buying a new car..

Before you lock yourself into this type of arrangement, investigate other types of car loans. Both bank and non-bank lenders will offer personal loans for a new car that may save you more money than with the zero percent interest dealer offer. This is because the loan is for the purchase price of the car, which will likely be cheaper than it would on 0% finance. While zero percent financing reduces the interest charges, don’t let it sway you to buy a car you can’t afford or don’t need. Finance companies also have an obligation to lend responsibly and to operate efficiently, honestly and fairly.

You can use our car loan repayment calculator to get an idea of your repayments and the current comparison rate to better inform yourself about what a standard finance arrangement might cost you. Also shop around for car finance deals and get at least three quotes before going into the showroom. At least if you do decide to take the 0% car finance option, you will have done so having done your research and taken all factors into account.

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