Is It Better To Finance A Car Through A Bank Or Dealership?

Is It Worth Financing a Car Through a Bank or Dealership?

Most buyers should explore both bank financing and a dealership when shopping for their next trip. While you can always take advantage of quick financing through an dealership, getting a car loan from a bank will help you negotiate better terms.

Bank financing versus dealership financing

Bank finance

Lower car loan rates and relationship discounts may be available.

At the dealership, bargain like a cash buyer.

Compare several banks to find the best terms and lowest rates.

Generally strict credit requirements

Dealership funding

The application process is usually the same day

Works with a variety of credit profiles.

Manufacturer discounts and rebates may be available.

The interest rate is often high.

Car financing through the bank

Even if you think you could use dealer financing, getting pre-approved from a bank helps you get the most out of your auto loan. Banks are often able to offer more competitive interest rates than dealerships and don't need to mark up their rates to make a profit.

If you already have an account - you can also score a relationship discount on your annual percentage rate if your bank offers it. But even if you don't, some banks will consider a positive banking history when reviewing your application, which can increase your chances of approval.

The application process for most major banks and credit unions is straightforward. It offers several online applications that allow you to pre-qualify for a car loan so you can see your potential rates. After that, you can apply for pre-approval. This will temporarily lower your credit score by a few points, but it allows you to go to the dealership and negotiate like a cash buyer.

Advantages of bank car financing

Car financing through the bank can help you get lower interest rates on car loans. You do not need to have an account with most banks to qualify.

Compare multiple options. A variety of banks offer auto loans, and you usually don't need an account to qualify. This allows you to compare costs and find the most competitive car loan terms.

Waiver of automatic payment. Some banks, like as US Bank, provide APR reductions if you set up recurring payments through your account.

Possibly lower annual interest rate. The average bank rate for a 60-month loan was 7.81 percent, according to Federal Reserve data. An dealership may beat the rate offered by your bank, but they will only try if you have an offer that has been pre-approved by the bank.

Disadvantages of bank car financing

While banks may be better for people with good or excellent credit, they can take longer to get them -- and limit those who qualify.

Long processing time. While the major banks are able to make a decision on your application within a few days, some may take longer - especially if your bank requires you to visit a branch to submit the application.

Strict eligibility criteria. Banks require a better credit score than dealership financing. If you have fair or bad credit or unsteady income, you may not qualify to work with a bank.

May limit purchasing power. Some banks work with an exclusive network of dealership. This limits your ability to purchase and negotiate if the outside dealership is able to offer more competitive rates.

Car financing through the Dealership

Dealerships work with major banks, online lenders, and credit unions to offer auto loans through their financing departments. Some major auto manufacturers also have financing companies that they own, known as captive lenders.

Dealership is still a good option, especially if your credit isn't in great shape. And even if you have an existing relationship with a bank, the merchant may be able to offer you better terms if you challenge them to beat a pre-approved rate.

Advantages of dealership financing

The dealership serves a wide range of borrowers. For some, this may mean that they can beat the rate your bank quotes you. For others, you may qualify for dealership financing even if you don't qualify in the bank.

Quick and easy process. Finding and applying for a bank car loan takes time. Dealerships can be one-stop shops - you can choose, finance and buy your car in one visit.

Manufacturer deals. If you shop at a manufacturer's dealer, you can take advantage of discounts and interest rate deals, including 0 percent APR.

The least restrictive eligibility criteria. Dealerships often have a network of lenders, including some that work with bad credit. This means that you can qualify at an dealership even if you don't qualify to work with a bank.

Disadvantages of Dealership Finance

Dealerships are able to assist borrowers who may not qualify at a bank or other lender. However, the financing you get will only be good for cars that are for sale in the location you're visiting - and of course, you'll encounter gains that aren't related to a bank loan.

Higher interest rates. It's not static, but dealers often mark up prices to make a profit. If you don't have a pre-approved offer, you may be stuck paying more so the merchant can make money.

Longer loan terms. Likewise, dealerships can offer you longer loan terms—sometimes as long as 96 months—to keep your monthly payment low. But that means you could end up paying thousands more in interest.

Good for cars in the lot only. Dealership financing will not cover other dealerships. If you can't find the car you want to sell, you'll need to go to another dealer and see if you qualify for financing there.

Many of the dealerships are reputable companies, but you should still be careful. If you have bad credit, you may find yourself in a lesser-known car lot, leaving you open to common auto loan scams such as UY financing.

How to choose between financing through an dealership or a bank

You don't have to choose between bank and dealership financing right away. In fact, it pays to check your rates with the bank -- and some online lenders -- before you go to the dealership.

The main advantage of going directly to a bank or credit union is that you will likely get a lower interest rate. They can offer more competitive deals because you are borrowing directly from them. When you fund through an dealership, the dealership acts like a middleman - which is why prices are so high.

Once you get pre-approval from the bank, you can go to the dealership and purchase the vehicle of your choice. When you apply for dealership financing, the finance office may be able to get you a better deal if you already have a loan. Manufacturer discounts, including as rebates and other special financing offers, are frequently available at many dealerships.

But you can always skip the bank and apply at the dealership altogether. Although it may not meet the best conditions for you, it will save time. For some, the few hundred dollars you can avoid paying interest for may be worth the loss in a much simpler process.

Next Steps

In general, applying for bank financing -- or financing through an alternative such as an online lender -- is the best step before visiting a dealership. By doing this, you can find out what you qualify for. If the dealership can outbid the bank, that's fantastic. If not, you may already have a loan to help with other aspects of the negotiation.

Therefore, stabilize your rate by first applying for pre-approval with a bank or other lender. Then be prepared to negotiate at the agency to make sure you get the best terms.