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No Interest Car Loans Explained

May 19, 2020 7 minute read
No Interest Car Loans Explained

What are no interest car loans?

When buying a car you may find that a lot of dealers offer new car loans at a 1% P.A. or even no interest car loans. The way no interest car loans work is pretty simple. Usually, you would buy your car at the advertised price at a dealership. After that, you’d make monthly repayments on the principal of the car without paying any interest.

Although this may sound like a really good deal, there are multiple things you should be aware of before committing to a no interest car loan. At Jacaranda Finance, we can’t provide no interest car loans. However, we can provide affordable car finance options of up to $35,000.

In the following guide, we’ll unpack how no interest car loans work, what to watch out for, and how our car loans might be a better fit for you.

How do no interest car loans work?

If you find that your desired car is advertised with a no interest car loan then that could most likely be a sales tactic by the dealership. Although you won’t be paying interest on your car loan, you might find that you may not be saving much money compared to a regular car loan.

For example, the dealership could be charging you a much higher retail price for the car or charging additional fees. The higher retail price and additional fees will accumulate over the term of your loan. This may end up costing you the same amount as a car loan with interest.

This could also apply to car dealers offering 1% finance. Just like with a no interest car loan, 1% finance could result in you being charged additional costs that are greater than the costs of a car loan with interest.

Low interest car loans 

Low interest car loans of 1% or less may be offered for a certain period only. What this means is after that, the loan could go back to its original high interest-rate. So, make sure you’re aware of any conditions before finalising anything with your dealer. The dealer could also require you to make a large lump sum payment at the end of the loan which is referred to as a balloon payment. This decreases the size of your monthly repayments, making them a lot more affordable. However, this can be more difficult to budget for in the long run.

Is a 1% or no interest car loan cheaper than a normal car loan?

This question depends on a few factors. A 1% or no interest car loan doesn’t necessarily cost less than a regular car loan with a higher interest rate. No interest car loans or 1% finance options may actually cost you the same amount as a regular car loan, if not greater. This is because they may come with additional fees or you may be paying more for the price of the car than what it’s worth elsewhere.

No interest offers usually require you to make a larger balloon payment towards the end of your car loan term. Although balloon payments reduce the cost of your monthly repayments, you will still need to budget your savings throughout the loan term to afford the large balloon payment sum at the end. Balloon payments can be tricky as you need to be prepared for the last large payment.

Failing to make a balloon payment, or any repayment beforehand, could result in your car getting repossessed. This would go on your credit report and affect your credit score, impacting your ability to get credit later on.  So, while normal car loans usually require more interest, the repayments are consistent. This ensures the debt will be paid off in full by the end of the loan term, making it easier to budget for. Ultimately, all credit comes with risk. As a result, you may wish to speak with a qualified financial advisor before agreeing to anything.

Where can I find no interest car loans?

Some car manufacturers could offer no interest car loan deals through their dealership. It’s much rarer to find a traditional lender offering a 1% or no interest car loan. In most cases, loan providers offering low or no interest terms may charge higher costs in other areas. So, it’s important to do your research before applying for no interest car loans

Top 3 benefits of no interest in car loans

There are some benefits associated with no interest car loans that may work in your favour and suit your budget. These include:

  1. Added extras (optional). When shopping for your new car, the dealership may give you the option of added extras such as a leather interior, free exterior paint job, or other luxurious extras that would usually cost more. With a no interest car loan, you may be able to intertwine those costs into the finance plan.
  2. Capped services. Dealerships may offer a no interest car loan and add capped dealer servicing to the cost of the loan. However, it’s vital to check whether or not that’s included in your contract with the dealer, and if so, how long those capped services are for.
  3. Larger loan amounts. The majority of banks and financial institutions limit how much they will lend you for a new car. However, with a no interest car loan and deposit, you may be able to secure a larger loan amount.

Top 6 risks of no interest car loans

Although there are a few benefits to a no interest car loan, there are also risks you need to consider. These risks include:

  1. An inflated cost. The cost of the car is going to be higher with a no interest car loan compared to financing it traditionally. Many dealers will inflate the cost of a car when offering a no interest car loan.
  2. Larger deposit. If you go into an agreement on a no interest car loan, you will most likely have to provide a large deposit at the start of your contract to secure the car.
  3. Credit history. People with close to excellent credit history will typically be considered for this type of financing. No interest car loans are especially difficult to get with a bad credit score.
  4. Additional fees. Be careful, as some manufacturers may be hiding extra interest in additional fees such as maintenance.
  5. High repayments. Manufacturers usually want no interest car loans to be paid off as soon as possible. As a result, they may limit your loan term options. With a limit on your loan term, you may end up paying higher monthly repayments.
  6. Non-negotiable. With this type of deal, it’s very rare for you to have the ability to negotiate the price of the car.

Key things to consider before applying

Before agreeing into any type of financial arrangement, make sure you shop around and compare different types of loan products. Although no interest car loans may seem like a great and affordable option, you may not end up saving as much money as you’d hope.

Just like any financial product, it’s very important to understand the terms and conditions of no interest car loans that you could be considering. Here are some key factors to keep in mind when looking at no interest car loans:

  • The purchase price advertised for the car could be higher than normal and is usually non-negotiable.
  • You will most likely be offered a lower cost for any vehicle you plan on trading in.
  • The loan structure which includes the term and whether it’s a balloon payment is usually not flexible.
  • You definitely won’t be charged interest. However, this is usually only for a set period. Make sure to ask your lender about how long you won’t be charged interest for before finalising your car purchase.
  • The principal/amount you borrow could be lower due to a balloon payment plan. However, this will have to be paid in full by the end of your loan term.

Looking for trustworthy car finance? Choose Jacaranda

If you’ve been searching for an affordable car loan, look no further than Jacaranda Finance. We can provide car loans from $5,000 to $35,000 with 1 to 5 year terms. Although we can’t promise no interest on our loans, we will work with you to find a suitable repayment plan. At Jacaranda, we also believe in 100% transparency. So, we will always be upfront with our fees and costs from the outset.

To apply, simply scroll up to our car loan slider to begin your application! Still got questions? Check out our FAQ pagefor more information or contact us directly to learn more.

For more general information on car loans, visit the Moneysmart website.

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