What's Better for Your Money? 0% APR or Pre-Approval? (2024)

Navigating the world of auto loans can be confusing, but knowing your options is the first step to making a smart financial decision. In this article, we'll look at two popular choices: the enticing 0% APR offers from dealerships and the often advantageous pre-approval from your local credit union. By comparing the two, we aim to equip you with the knowledgeto choose the best financing option for your next vehicle purchase.

What is a 0% APR Auto Loan?

A 0% APR auto loan is a loan on which the borrower pays no interest. APR stands for Annual Percentage Rate, and when that rate is set at 0%, the borrower's monthly payments won't have any interest added on.Sounds great, doesn't it? But here's the catch: 0% APR auto loans, while tempting, are often used by dealerships for their own reasons, which might not benefit you in the long run.

7 Things toLook Out for When Considering a 0% APR Auto Loan

1. Dealerships use the 0% APR offer to lure unprepared car shoppers into their showrooms. Once they get a shopper comfortable with the prospect of driving away in a new vehicle, they'll start to reveal some of the catches that come with a 0% APR offer or try to upsell you on a different vehicle.

2. 0% APR is only offered on specific models that aren't selling as fast as the other popular models. This restricts the shopper's options to only a few models, and dealerships won't offer 0% APR on any used vehicles.
3. The vehicle's sticker price could be higher than usual and include hidden feessince they won't be making any money on interest. This is done to help the dealerships cover their losses.
4. Rebates and other money-back incentives are likely not included in a 0% APR auto loan. These special incentives are off the table because the dealerships believe 0% APR is a good enough incentive on its own, not able to be coupled with other offers.
5. Strict loan terms. It is highly likely that the 0% APR offer the borrower thought would save them money can result in higher monthly payments due to shorter loan terms that the dealership won't negotiate on.
6. Sneaky fine print.Somedealerships can include fine printthat makes the borrower liable to pay interest on the total loan amount if they're late on even one payment. If the dealership doesn't hold you liable for interest on the total loan amount, they could take away the 0% APR and charge you a high interest rate for the remainder of the loan as a penalty.
7. 0% APR auto loans are reserved for "well-qualified" buyers. In most cases, "well-qualified" refers to borrowers who have a credit score of 740 or higher. If a borrower isn't in this credit bracket and they apply for the 0% APR offer, they could be taking a hit on their credit score that could have been avoided. It's important to remember that applying for an auto loan counts as a hard inquiry on your credit report. This is why it's essential to be prepared before you shop for a vehicle, and we want to make sure you're ready to make smart purchasing decisions before arriving at the dealership.

What We Recommend

Secure a pre-approvalbefore you shop to put negotiating power back in your hands as you search for your dream vehicle. With pre-approval, you won't be limited to only a few options, and you can get the same great rate for new and used vehicles. If you want to add popular vehicle protection services like Guaranteed Asset Protection and Major Mechanical Protection, see if the lender who pre-approved you offers them. They will likely be much cheaper than the same services sold at the dealership if they are available. When youfinance with your credit union,you have more flexibility to choose your terms, which puts you in control of your monthly payments.

If you automatically received a pre-approval offer through mail or email, accepting and using that pre-approval won't negatively impact your credit score. If you want to apply for a pre-approval, we recommend applying to 2 or 3 lenders in a 14-day time frame. When multiple lenders make an inquiry on your credit report quickly, it will only count as one inquiry and lessen the impact on your credit score. From there, you can choose your best offer and go shopping, knowing your financing is already secured.

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Sources: Ramsey Solutions, Bankrate, Consumer Financial Protection Bureau, Federal Trade Commission Consumer Advice, and RateGenius