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Car Buying Guide: When NOT To Get A Car Loan From A Dealer


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We have been discussing how an unprepared car buyer can spend hundreds, even thousands of dollars more than necessary by not arranging for a car loan prior to walking into a car dealership. We’ve also learned that there are circumstances when you are better off getting your car loan from the dealer and not your bank, credit union, or online lender. This is especially true when a manufacturer offers a reduced interest rate, such as zero percent financing.

When to Look Further
You can save a lot of money by taking advantage of zero percent financing. However, there are times when all is not as it seems. For example, read the fine print of any zero percent financing offer that piques your interest. Check for a phrase at the bottom of the ad that says something like: “Dealer participation may affect the selling price.”

Why read the fine print? Some car dealers effectively offer two prices:

  1. a higher selling price to compensate for the lower interest rate
  2. a lower selling price if the buyer chooses not to use the lower interest rate

No Free Lunch?
Economist Milton Friedman once said:There’s no such thing as a free lunch.” In other words, someone has to pay for what we get, even if it’s not us. In that same light, someone has to pay for your reduced interest rate, and the actual cost can be sizeable.

We learned this in our last article in this series:

  • You save $3,193.80 over the term of a 60 month, $20,000 car loan with zero percent financing compared to a standard interest rate of 5.99%.

In the above case, a manufacturer is willing to underwrite the cost of the loan by over three thousand dollars as incentive for someone to buy their vehicle. Other times they will offer a lower interest rate OR a cash rebate. This offers a clear option to the buyer: buy this vehicle instead of another one and choose how you want to save money. Clear. Easy. Simple.

Not So Clear, Easy, or Simple
Manufacturers deal with huge budgets and promotions. They have deeper pockets than car dealers. This means that manufacturers can offer bigger savings on a particular vehicle than most dealers. Yet, dealers want in on the zero percent financing frenzy, too. But when they offer a reduced interest rate by keeping the price of the car higher, it’s time for buyers to think carefully about what benefits them the most.

The way around this dilemma is to comparison shop. Check other dealers for their lowest price to make sure you are getting the best deal possible for your circumstances.

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