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Is It Better to Finance a Car Through a Bank or Dealership?

If you’re in the market for a new car and don’t have the cash to pay for it outright, you have the option to finance the purchase through a bank or a dealership. The right choice for you depends on several factors, and neither option is inherently better for every car buyer. Here’s what you need to know about each option to determine the best one for you.

Pros and Cons of Financing a Car Through a Bank

Financing a car through a bank involves going directly to a bank or credit union to get a car loan. This allows you to cut out the dealer as a middleman and get preapproved for a loan before you ever set foot in the dealership. Depending on the bank or credit union, you can apply online or at a local branch. In some cases, you may need to provide information about the vehicle you’re planning to buy.

Pros

• Could ensure you get the best terms possible: Dealers typically have a set of lenders they work with, and it’s possible to get better terms somewhere else. The rate offered by a bank or credit union won’t include any dealer markup.
• Could help you avoid additional costs: Having a specific approved loan amount on paper could keep the car salesperson from trying to persuade you to include add-ons that you don’t need.
• Saves time at the dealership: Once you’ve decided on a model, the financing process can take some time. Having your financing taken care of upfront can help you save time.

Cons

• You’re not guaranteed a lower rate: While shopping around on your own improves your odds of getting a low interest rate, it’s not a guarantee. In some cases, the dealer may be running a promotion on newer vehicles, allowing you to get a rate as low as 0% if you have excellent credit.
• Possible delays: If you don’t yet know which model you want, some lenders may not be willing to offer preapproval, delaying the car buying process.
• You’ll have to navigate the process on your own: Shopping around for a car loan can be time-consuming, and if you’re buying a used car, you’ll have to look up vehicle and eligibility requirements on your own.

How to Finance a Car Through a Bank

The process of applying for and getting approved for a car loan can vary depending on the bank. Here’s a general idea of what you can expect:

1. Prequalify with multiple lenders. Search for auto lenders online and, if possible, go through the prequalification process. This typically doesn’t require a hard credit inquiry, so it won’t damage your credit.
2. Pick a lender and apply. Once you’ve decided on a lender you like, submit a loan application. You may need more specifics about the vehicle at this point in the process, and you’ll also need to provide some documentation for your income, physical address, identity, and more.
3. Make your purchase. Shop online or visit the dealership and let them know you already have financing arranged. This essentially allows you to shop like a cash buyer. Your lender will give you instructions on how to complete the purchase using the financing.

Pros and Cons of Financing a Car Through a Dealership

Dealer-arranged financing works a lot like bank financing—the only major 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.

Pros

• Convenience: If you don’t have time to shop around on your own or you don’t want to spend the time, having the dealer take care of the process can be incredibly convenient.
• More flexibility: You won’t have to worry about being limited to dealerships within a lender’s network; you can focus your search on the vehicle, regardless of which dealer is selling it.
• More options if you have bad credit: If your credit is in poor shape, there are dealers that specialize in working with you and your needs.

Cons

• Can be more expensive: In some cases, 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.
• Less control: You won’t be able to pick which lenders the dealer sends your application to, which gives you less control over your loan offers.
• Not available for private-party transactions: If you’re buying a car from a private party instead of a dealer, this option won’t be available to you.

How to Finance a Car Through a Dealership

As with lenders, each dealer may have its own approach to financing. In general, here’s what to expect:

1. Visit the dealership. Visit the dealership and choose the vehicle you want to buy. At this point, you’ll want to negotiate the price to ensure you get the best deal.
2. Fill out a credit application. The dealer will ask you to fill out a credit application, which they will submit to multiple lenders.
3. Choose the best offer. When the dealer returns with your offers, select the one with the best terms.

Prepare Yourself Financially Before Applying for an Auto Loan

Understanding how to get the best financing for your car is important, but it’s just as important to prepare yourself in other ways. For starters, check your credit score to see where you stand. If it needs work and you have time, consider taking steps to improve your credit before you apply.

Also, work on saving a down payment for the loan. The higher the down payment, the less you have to finance, and the less you’ll pay in interest over the life of the loan.

Finally, check your budget to make sure you can afford the monthly payment. The last thing you want is to drive off the lot in a car that will cause you more distress than joy.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financing options with confidence and ease.

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