0% APR car finance

If you’re looking for a car finance offer, 0% APR car finance can be a good option; this is our guide to its pros and cons

BuyaCar team
Jul 4, 2022

If you find a 0% APR finance offer on a brand new car, then it could represent great value, since the lender is charging no interest on the deal and you should end up paying no more overall than if you were to buy the car outright in cash.

However, be aware that 0% APR deals on new cars often miss out on financial incentives such as deposit contributions and other discounts or offers that might be available on with finance deals that charge interest. Because of this, your monthly payments might well be higher than with non-0% APR deals for the same brand new car.

In theory, if you have two identical new car deals, one with 0% APR and the other charging interest, the 0% APR offer should provide better value as there is no interest being added to the monthly payments or the overall costs. But this is only true provided there are no other discounts, as these could outweigh the extra cost of the interest you’ll pay on the deal - so you need to do your sums.

Another issue to consider is the fact that nearly new or used models can offer considerably better value on like-for-like finance terms. This means that, given the same deposit, contract length and mileage limit, a Personal Contract Purchase (PCP) or Hire Purchase (HP) deal on a used or nearly new car could easily cost much less in monthly payments than for a brand new model - even one with 0% APR.

This is because cars lose their value rapidly, so a nearly new car - even if it’s only a few months old - can cost far less outright than an equivalent new one, making the monthly payments much cheaper even when you’re paying interest, as you're borrowing a much smaller amount in the first place.

0% APR finance for used cars

Generally speaking, 0% APR car finance is not as common with used cars as it is with brand new ones.

In addition, some 0% APR deals increase the initial list price of the car, so while you might not be paying interest, you’re still paying more than the vehicle might cost elsewhere or by purchasing it outright. This can also be the case with Islamic car finance.

Therefore, you can often get a deal with lower monthly payments by going for a strong value used car with a low cash price and finance that charges interest - in many cases this could mean you end up paying less than if you get a new car with 0% APR finance or even a used car with a high cash price and 0% APR.

0% APR finance: how it works

APR stands for annual percentage rate. It’s a standard way of calculating the full cost of finance and takes into account the interest charged on borrowing, 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 means 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 the car you’re considering outright in cash.

A 0% APR offer often doesn’t take into account the discounts available in other forms of new car deals, however. For example, a manufacturer 0% APR offer may not include a deposit contribution or other discount incentive, so you’ll repay the full retail price of the car, as advertised in the brochure.

If you’re buying in cash, you might be able to get a discount off the price, making the car cheaper, but bigger discounts are typically available if you opt for a finance deal that charges interest. If you are able to keep the contract length short, then this can work out to be the cheapest option overall.

Types of 0% APR 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 lower monthly payments and greater flexibility because the monthly payments only cover part of the car’s cost – the value that it’s expected to lose during the length of the contract 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 - known as the optional final payment - and you’ll then own the vehicle. This final payment amount can also be refinanced.

Should the car be 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 than for a PCP on an otherwise like-for-like deal 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 give the lender a greater chance of getting 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 missing their payments.

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


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