Financing Car Through a Dealer or Bank: Which is Better?

Financing Car Through a Dealer or Bank: Which is Better?

Financing through a dealer or bank: If you need a loan to buy a car, you can consider financing the purchase through a bank or directly from the car dealer. Making the right choice is dependent on some different factors which makes neither of the two options totally different from the other.

Financing Car Through Dealer or Bank

Depending on the situation, choosing one over the other could save you both time and money. Read on for more information and options on how to make the right choice.

Dealership financing vs. auto loans

Dealership finance Auto loan
Interest rates
  • Can offer lower interest rates than car loans
  • Low interest rates may only be available for promoted makes and models
  • Commission for the car salesman may push rates up
  • 0% rate deals may indicate a higher purchase price for the car
  • Lenders offer various rates, which means you can choose the most competitive
  • Using your car as collateral lets you take advantage of lower rates
Loan term
  • Typically 3-year terms
  • A down payment is generally required
  • Early repayment costs may apply
  • Choose rates between 1 and 7 years
  • Early repayment costs differ between lenders
Who it’s best for
Borrowers that want to buy a new car and have a down payment.
Borrowers that want to shop around and have the option of buying from a dealer or a private seller.

Financing Through a Bank

Bank financing involves going directly to a bank or a credit union to get a car loan. Generally, you’ll get preapproved for a loan before you ever set foot in the dealership. The lender will give you a quote and a letter of commitment that you will take to the dealer, saving yourself some time when finalizing the contract. Having a specific approved loan amount on paper can also keep the car salesperson from trying to persuade you to include add-ons that you do not need.

Depending on the bank or credit union, you can apply for preapproval online or at a local branch. You might have to provide information about the vehicle, which could cause some delays if you’re not yet sure what you want.

The rate offer from a bank or credit union will be the true interest rate and does not include any markup, which can happen when you work with a dealer. Generally, though, the rate quote you get is not going to be final offer. When you head to the dealership to buy the car, the lender will run a hard credit check and review your full credit report before approving your application and determining your loan rates.

One thing to have in mind is that your options may vary depending on whether you’re buying a new or used car. Some banks and credit unions have a limit on the vehicle’s age and mileage, and new vehicles may qualify for lower interest rates in general.

Financing Through the Dealer

Dealer-arranged financing works the same way as bank financing—the only difference is that the dealer is doing the work on your behalf.

After you choose your vehicle, the dealer will have you fill out a credit application, which they’ll submit to multiple lenders. This allows you to compare rates and terms to choose the best option for you.

In some cases, however, a dealer may negotiate a higher interest rate with you than what the lender offers and take the difference as compensation for handling the financing. In other words, you might not be getting all the information you need to make the best decision.

Generally, you can usually get lower interest rates on a new car through a dealer than on a used car. In fact, some dealers may offer promotional financing on brand-new models, including rates as low as 0% APR to those who qualify.

Another form of dealer financing occurs when the dealership provides in-house financing. These buy here, pay here dealerships specialize in working with people with bad or no credit. But the costs and down payment requirements on these loans are high, and there’s also a higher chance of repossession.

Which Option is Best For Me?

Which Option is Best For Me?

It depends on your situation. If you’re looking for a more hands-off experience or need funding fast, dealership financing might be a better option. But before financing car through dealer or bank know what you are looking for

Benefits and drawbacks of dealership financing

Here’s why you might and might not want to finance through your dealership.

Benefits

  • The dealer finance representative handles the paperwork
  • No need to shop around for better offers
  • Gives you leverage to negotiate the sale price

Drawbacks

  • You need good credit to be eligible
  • It’s usually only available for newer vehicles
  • Down payments can be a large upfront cost

Benefits and drawbacks of car loans

Here’s why you might and might not want to get financing from a bank, credit union or online lender.

Benefits

  • A range of competitive car loans are available
  • You can choose your lender and loan type
  • Loans are available for new, used and classic cars

Drawbacks

  • Fewer promotional deals like 0% financing
  • Upfront and ongoing fees may apply
  • Less room to negotiate

Consider these other options

  • Paying in cash. If you have the money upfront, you don’t need to finance your vehicle at all.
  • Crowdfunding. You might be able to raise the funds from your friends and family — especially if you have a compelling story to tell about why you need the car.
  • Home equity loans. Borrowing against the amount you own in your home could be a cheaper way to fund a car loan — though you risk losing your home if you default.
  • 401(k) loans. Some employers might let you borrow from your 401(k). While loan is essentially interest-free, it comes with some significant risks.
  • New credit cards. If you’ve got a new card with a 0% promotionnal period, you might be able to put some or all of your car loan on plastic. Try to pay as much off as possible before that period is over to avoid those high credit card APRs.

Bottom line

Dealer financing can be a good option in certain situations, such as when you’re buying a new car and you have excellent credit. But dealers’ financing departments will often send your application to various banks and credit unions to find you a loan offer, and then mark up the interest rate. It might be better off going directly to a lender yourself. Even if you wind up with the same rate, it is worth checking and may take some pressure out of the car-buying experience.

Which Option is Best For Me? bottom line

Convenience usually comes with a price and that extends to the dealer-financed car loan. Before settling for what a dealer can offer, compare outside banks, online lenders and credit unions. In most cases, you will find terms that are better than the dealer’s.

No matter what route you choose when car shopping, always put in the time to research so you understand how to get the most out of your options for car loans.

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