Dealer Financing vs Bank Loan: The $3,000 Difference Nobody Mentions
0% APR sounds unbeatable—until you see what it actually costs. Here's how dealerships make money on "free" financing and how to beat them at their own game.
The dealership offers you 0% APR for 60 months. Your credit union pre-approved you at 5.5%. Zero percent is obviously better than 5.5%, right? Not so fast. Dealer financing comes with hidden costs that can make "free" financing surprisingly expensive.
How Dealers Make Money on 0% APR
Here's the secret: 0% financing is never actually free. The manufacturer subsidizes that rate—and they only do it when you pay full sticker price (or close to it).
The alternative? Take their cash rebate instead and finance with your own lender. That rebate is often worth $2,000-$5,000.
The Hidden Choice You're Not Told About
Option A: 0% APR
- • Car price: $35,000
- • Interest paid: $0
- • Total cost: $35,000
Option B: $3,500 rebate + 5.5% APR
- • Car price: $31,500
- • Interest paid: $4,500
- • Total cost: $36,000
Wait—the 0% option is actually cheaper here? Yes! But that's with a $3,500 rebate. With a $5,000+ rebate, the math often flips.
The Real Comparison
Let's look at a real scenario where the rebate makes outside financing the winner:
| 0% Dealer | Rebate + Bank | |
|---|---|---|
| Vehicle MSRP | $40,000 | $40,000 |
| Cash rebate | $0 | -$5,000 |
| Amount financed | $40,000 | $35,000 |
| Interest (60 mo) | $0 | $4,850 |
| Total cost | $40,000 | $39,850 |
The "free" financing costs you $150 more in this example. And if you negotiated an even lower rate or found a better rebate, the gap widens.
Other Dealer Financing Traps
Rate markup
Dealers can mark up the rate your bank approved and pocket the difference. If the bank says 5%, the dealer might quote you 7%.
Extended term pressure
They'll focus on monthly payment, not total cost. "Just $399/month!" But that's over 84 months with massive interest.
Add-on products
GAP insurance, extended warranties, paint protection—all rolled into the financing where you'll pay interest on them too.
How to Win the Financing Game
Get pre-approved before you shop
Check your credit union, bank, and online lenders. Know your best rate before walking onto the lot.
Ask about rebates vs. special APR
Always ask: "What rebates am I giving up if I take your 0% financing?" Get both numbers.
Do the math—both ways
Calculate total cost with 0% financing vs. rebate + your pre-approved rate. The answer might surprise you.
Negotiate price separately from financing
Agree on the out-the-door price first. Then discuss financing. Never let them blend the two.
When Dealer Financing Wins
To be fair, dealer 0% financing is sometimes the better deal:
- When the rebate is small (under $2,000)
- When your credit score only qualifies you for high rates (7%+)
- When you plan to pay off early anyway (0% has no penalty)
The Bottom Line
"0% APR" is a marketing tool, not a gift. Dealerships aren't charities—they're making money somewhere. Your job is to figure out where and whether you're okay with it.
Always compare total cost, not monthly payments. The cheapest deal isn't always the one with the lowest rate.
Calculate Your Total Cost
Compare financing options side-by-side and see which deal actually saves you money.
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