What is interest-free credit?

Financing a car and want lower monthly payments? Keep an eye out for deals with no interest added.

Interest-free credit is an incentive offered with car finance deals that could see you pay zero interest on the value of the car. Also known as 0% APR, it’s generally offered on new cars and means you’re not charged to borrow the money.

A standard car finance agreement typically includes interest on the cost of a car. That means that the more you borrow (the more expensive the car) and the longer the contract, the more interest you pay. Interest-free credit means you only pay back the money you borrow with nothing added on top.

What’s the catch with interest-free credit?

On paper at least, interest-free credit is a fantastic offer. You get to pay for your next car in affordable instalments and don’t pay anything extra for the privilege.

However, it may not be the best deal. Other deals may include discounts or deposit contributions, which could actually save you more than the cost of the interest. It’s always worth comparing quotes on the same car to see if a discounted or incentivised deal works out cheaper overall than an interest-free deal that doesn’t get those extras. Quotes will give you a breakdown of the costs you’ll pay, including the monthly payments, so you can work out the best deal.

Deposit contributions versus interest-free credit

Manufacturers often offer deposit contributions to tempt people to their new car finance deals, and this can be substantial – discounts often go well into the thousands. A deal with a deposit contribution of £2000 could be worth considerably more than an interest-free credit deal that saves you only £1000 in interest. Always get like-for-like quotes with the same car, deposit, contract length and mileage allowance to weigh up discounts against interest savings, so you can see what works out best for you.

Can you get interest-free credit AND a deposit contribution?

From time to time, you may spot offers that include interest-free credit as well as a deposit contribution, and these can represent excellent value – you get a discount off the total cost and won’t have to pay interest, either.

You’ll likely find these kinds of deals on more expensive cars, but even if you spot one it’s still worth weighing up if there are other discounted offers available. Cars with 0% APR deals and discounts are likely to have other discounted offers available, too.

Can I get interest-free credit on a used car?

Generally speaking, interest-free credit is only available on new cars, because the manufacturer usually subsidises the cost of the finance, rather than offering a discount.

While you may see used car dealers offering interest-free credit, that’s normally achieved by raising the price of the car to cover the cost, meaning you’re being overcharged for the car itself. In that case, you won’t see lower monthly payments than an equivalent deal without the interest-free offer but with a lower car price. Your payments could even be higher.

Once again, we’d always recommend studying several like-for-like finance quotes to see which option is the best value.

Is there a minimum deposit for interest-free credit car finance deals?

If there are several different finance offers on the same car, you might have to put down a minimum deposit in order to get interest-free credit. Alternatively, you might have to go for a shorter contract. However, that’s not always the case. You may even find deals with interest-free credit and no deposit, meaning you don’t have to have a large chunk of cash to hand in order to avoid paying interest.