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Should I borrow from a car dealer or a bank to buy a car?

If you’ve driven past a car dealership lately, you may have seen the signs: "Special 0% financing!" "Only 1.3% on selected models!" "Lowest rates ever!"

Deals for low or even zero per cent financing on your new car sound really good. Are they for real? The answer is sometimes "yes," sometimes "no."

How does low or zero per cent financing work?

We’re usually told that if something sounds too good to be true, it likely is. However, these special financing offers sometimes can truly be great deals. Manufacturers sometimes offer low rates to:

  • Help dealers sell models that are not selling
  • Gain a bigger share of the market. For instance, a car manufacturer may want to be able to say their car is "North America’s best-selling mid-size sedan."

What do I need to watch out for?

  • Only about 20% of car buyers actually qualify for low financing. You must have a good credit report and a high credit score. Your credit report, also known as your credit profile, is a detailed record of your credit history.
  • Sometimes the loan term is much shorter than usual. Most car loans are four or five years. The special deal may cover just two or three years. Since you have to pay back the loan faster, you’ll end up with a much higher monthly payment. The good news is you’ll pay less interest. But ask yourself if you can you meet the payments.
  • You often get to pick between a low financing rate and a manufacturer’s rebate. You can apply the cash from the rebate to your down payment, so you borrow less and pay less interest over time. With some cars, you may get up to a few thousand dollars back, so the rebate may be a better choice.

Is dealer financing a better deal?

There are many reasons people choose dealer financing. Often, the interest rates are better than you can get from a bank. But not always.

In some cases, the dealer may go to a bank to arrange financing for you. They may charge you extra for this service, so be careful. You may do better if you arrange your own financing directly with your bank.

Before you decide, it pays to shop around. Use this chart to compare your options.