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4 MIN. READ
Key takeaways:
- Financing a new or used car at the dealership can be tempting because it’s convenient, and some dealers offer 0% financing.
- However, financing at the dealership usually comes with additional fees.
- It’s better to get pre-approved so you can compare rates and pick a lender you can trust.
You've had your eye on a vehicle at the local car dealership, and it's finally time to take a more serious look. Now that you’re up close, you can confirm: It’s the perfect fit for you and your family. Plus, they are offering zero-percent financing!
In all the excitement, it’s easy to follow the salesperson to their office, sign on the dotted line, and drive away without another thought. However, it pays to take a pause! Before committing to their financing offer, make one quick phone call. A conversation with your personal finance professional can save you thousands of dollars and help you avoid hidden costs.
What’s Wrong With Financing at the Dealership?
It seems logical to finance your vehicle at the dealership, since that is where you negotiated the price. In fact, according to Equifax, 16% of Americans choose this option when buying a new car.
The truth is that one-stop shopping could end up costing you money. Dealerships are incentivized to have you buy a car on terms that are best for their business, not your wallet:
- Dealerships can charge a dealer reserve. This is a markup they add to the interest rate the lender is offering. It can be anywhere between 1 and 3% extra.
- Some lenders offer a flat-fee incentive. With this model, the dealership will recommend the loan with the highest incentive for them, and they won't even inform you of the other options available.
Financing at the dealership can also come with some questionable practices:
- Some dealerships can tack on add-ons, such as GAP coverage or an extended warranty, without telling you.
- You also have to watch out for yo-yo financing. It’s a practice where the dealership calls you back a few days after you’ve had the car, claiming the financing fell through, and asks you to come in again to apply for another loan (with a higher interest rate).
Are You Getting a Good Deal With Zero-Percent Financing?
You might encounter the words “zero-percent financing” at the car dealership, which means that you pay no interest on the loan. That sounds great! But when you dig deeper, you’ll find there’s more to this story.
Dealerships sometimes raise vehicle prices to offset the cost of offering no-interest financing. Zero-percent financing loans also tend to have large baked-in penalties and fees. For example, some loans may penalize the borrower for paying off the loan earlier than expected, through additional fees or retroactive interest.
Why You Should Get Pre-Approved for a Car Loan Instead
Instead of financing at the dealership, take the time to shop around and get pre-approved for your car loan.
Walking into a dealership with a pre-approval puts you in control:
- You know exactly how much you can afford to spend.
- You won’t have to worry about dealer reserves and other markups.
You’ll also know your interest rate and monthly payments in advance.
Plus, getting pre-approved gives you time to compare different lenders. You can see the rates and terms different banks and credit unions are offering to get the best deal possible.
| Financing at the Dealership | Getting Pre-Approved for a Car Loan | |
| Who controls the loan terms | The dealership and its lender partners | You, by choosing your preferred lender and loan terms |
| Interest rates | Often includes dealer markups (1 to 3% higher) | Typically lower, since you’re dealing directly with a bank or credit union |
| Transparency | Limited; dealerships may not disclose all loan options | Full transparency about rates, fees, and repayment terms |
| Add-ons and hidden costs | Common, dealers may include extras like GAP coverage or extended warranties without clear consent | You avoid unexpected add-ons and approve only what you need |
| Negotiating power | Limited, you’re focused on both price and loan at once | Stronger, you can negotiate the car price separately from financing |
| Risk of yo-yo financing | Higher financing could “fall through” after the sale, leading to a worse loan later | None, your financing is already secured |
| Time and effort | Faster upfront but often more expensive long-term | Takes extra time but can save you money overall |
| Overall advantage | Convenient but may cost more and carry more risk | Offers more control, better rates, and long-term savings |
Get Pre-Approved With Power Financial Credit Union (Or Refinance a Loan From the Dealership)
Power Financial Credit Union offers flexible auto loans with competitive rates. We offer financing options for new and used vehicles, as well as refinancing for vehicles you've already financed.
Stop by one of our South Florida branches to learn more or contact us online.
FAQs
Why can dealership financing for a car cost more?
Dealerships often add markups, known as dealer reserves, to your loan rate, raising your overall cost. They may also include hidden fees or extras you didn’t agree to.
What does “zero-percent financing” really mean at the dealership?
It’s a promotional offer that lets you pay no interest, but dealerships may increase the car’s price or add high fees to make up the difference.
Can I refinance if I financed through a dealership?
Yes, you can refinance with a bank or credit union to lower your rate, reduce payments, or save on interest over time.
Why should I get pre-approved for a car loan?
Pre-approval gives you a locked-in rate, clear terms, and the freedom to negotiate the car’s price without dealer pressure.