Introduction
The car is one of the biggest purchases that a person will make and one of the most important decisions that must be made is how to pay for it. While there are those buyers who will be able to afford the cost of the product, most of them will have to take a loan in order to make the purchase. The big question then arises: whether it is better to obtain financing from a dealership or a bank?
Each is good and bad in its way, and the best choice is relative to one’s financial circumstances. That is why at Automatic Car Credit, we want to make sure that you make the right decision. This guide will compare dealership financing against bank financing so that you can know the best option to take when you are next in the market for a car.
What is Dealership Financing?
Dealer financing refers to a situation whereby you obtain your auto finance from the dealership where you are sourcing the car. In this case, the dealership helps you in arranging a loan by partnering with a bank, credit union or even a finance company.
How Dealership Financing Works:
- You seek loans with the auto dealer.
- The dealer forwards your application to various lenders in order to get the loan quotes.
- The dealer offers you the loan’s interest rate and the period within which you are supposed to make the repayments.
What is Bank Financing?
Bank financing on the other hand means obtaining an auto loan from a direct money lending institution such as a bank or a credit union. In this case, you approach the bank and get a loan, which you are pre-approved for and then use it to pay for the car at the dealership.
How Bank Financing Works:
- You go to a bank or any credit union of your choice to apply for an auto loan.
- The bank analyzes your credit and financial history in order to come up with the loan terms.
- After approval you get the money to pay the dealership and you purchase a car.
Pros and Cons of Dealership Financing
Pros of Dealership Financing:
Convenience:
The dealership can handle everything in one place—finding the car, securing the financing, and completing the paperwork.
Special Offers:
Dealerships often run promotions like 0% APR for qualified buyers or cash-back offers, making this option more attractive.
Flexible Credit Options:
Some dealerships work with multiple lenders, including those that offer loans to people with lower credit scores.
Cons of Dealership Financing:
Higher Interest Rates:
Dealership financing may come with higher interest rates compared to banks, as dealers often mark up the interest to make a profit.
Pressure to Buy:
Dealership financing might pressure you to finalize the deal quickly, potentially leading to less favorable terms if you haven’t had time to compare options.
Limited Loan Options:
While dealerships may offer a few loan choices, they may not always have the best terms for your situation.
Pros and Cons of Bank Financing
Pros of Bank Financing:
Lower Interest Rates:
Banks and credit unions often offer lower interest rates than dealership financing, particularly for borrowers with good credit.
Pre-Approval Advantage:
Getting pre-approved for a loan before going to the dealership gives you a clearer idea of your budget and allows you to negotiate from a stronger position.
More Transparency:
Banks typically offer more straightforward and transparent loan terms, without hidden fees or added markups.
Cons of Bank Financing:
More Legwork:
You’ll need to handle more of the process yourself—applying for the loan at the bank, waiting for approval, and then taking the loan to the dealership.
Fewer Promotions:
Banks don’t typically offer special deals like 0% financing or cash-back offers that you may find with dealership financing.
Stricter Credit Requirements:
Banks may have stricter credit and income requirements, meaning it could be harder for people with bad credit to qualify for a loan.
Interest Rate and Term Comparison
Interest rate is one of the most crucial factors that should be taken into consideration when choosing the right financing. Most car dealers source their financing from a number of lenders and this means that you may find yourself being charged anything from a low of 3 percent to a high of 25 percent or more depending on your credit rating. In contrast, the banks and credit unions are known to provide higher and more uniform rates for the people with good credit scores.
Flexibility in Loan Options
The loan terms may also be more flexible from the dealerships particularly to buyers with a low credit score. They may be willing to negotiate with the specialized lenders who deal with people with bad credit scores which will enable you to get a loan even if your credit score is not good.
However, the banks and credit unions may have better loan structures, which are characterized by better features such as low-interest rates and short loan period. Furthermore, the majority of the banks offer pre-approval, which makes the process of purchasing a car easier and helps to gain an advantage during the bargaining over the price of the car.
Is Pre-Approval of a Loan Useful?
In general, it is wise to get pre-approved for a loan regardless of whether you decide to go through a bank or a dealership. It enables you to know the amount of money you can borrow and the estimated interest rate that you will be charged hence enabling you to bargain for the price of the car effectively.
Benefits of Pre-Approval:
Know your budget:
Pre-approval also informs you the amount that you are likely to be approved for, thus enabling you to avoid going for a loan that is beyond your financial capacity.
Leverage in negotiations:
If you go to a dealership with a pre-approved loan, you will have a lot of leverage on your side.
Faster car-buying process:
Financing pre-approval can help you when you are in a position to buy your car since it shortens the time taken to secure the financing.
Bottom Line
The final decision of selecting between dealership financing and bank financing is based on the situations as follows. In-house financing is easy and can sometimes include incentives but you will find that the interest rate is high and other charges are concealed. Bank financing, on the other hand, is cheaper, more transparent, but requires more paperwork.
At Automatic Car Credit, we’re committed to helping you find the best financing option for your next car. Whether you’re buying your first car or upgrading to a new model, our team is ready to guide you through the process to ensure you get the loan that’s right for you.