Which Should You Use to Finance Your Car: A Bank Loan or a Dealership Loan?

When you’re shopping around for a car loan, you may find yourself wondering which type is the best and what are some perks of getting a car dealership loan vs. a bank loan. Although both offer different advantages, they also come with their own set of risks that must be considered. So, in this article, we will answer some of the most common questions including is direct lending or dealer financing a better option.   

But, let’s first cover a few key things you must keep in mind when trying to decide whether to finance a car through a bank or dealership loan.   

One of the most important factors is what kind of interest rate you can get. Dealership loans typically come with higher interest rates than bank loans, so if you’re looking to save money on interest, a bank loan is usually better for this.  

Another thing you should take a look at is the terms of the loan. Bank loans typically have longer repayment times, so if you’re looking to keep your monthly payments lower, this option may be the way to go.   

Finally, it’s important to think about what kind of customer service you’re looking for. If you want the convenience of working with someone at the dealership who can both help you through the financing process and get a perfect car, a dealership loan may be the right choice for you.   

How Does a Loan for a Car Dealership Work?

Dealer financing vs. bank financing is a loan that is provided by the car dealership itself so it is in-house financing for used or new cars. The interest rate on a dealership loan is typically higher than the interest rate on a bank loan. The terms are also usually shorter, which means that the monthly payments are typically higher, but this isn’t such a bad thing as you will be debt free faster.  

If you’re thinking about financing a new or used car from a dealership, you may be wondering how it all works. First, you’ll need to find out if car dealers offer this in-house financing. Not all dealerships do, so this is an important step. Once you’ve found a dealer that does offer it, you’ll need to fill out a credit application.  

The credit application will ask for information about your income, debts, and assets. The dealer will use this information to determine if you’re eligible for financing and what interest rate they can offer you. If you’re approved for financing, the dealer will then work with you to choose a vehicle that fits your budget.  

Once you’ve chosen a vehicle, the dealership will finalize the sale and arrange for your loan paperwork to be signed. Be sure to read over the loan agreement carefully once again before signing it, because once it’s signed, you’re responsible for repaying the loan according to the terms agreed upon.  

In case you have any further questions about how dealership financing works, be sure to ask the salesperson or finance manager at the dealership. They should be able to explain all you need to know in detail.  

Advantages  

There are a few key advantages that come with securing a dealership loan as opposed to a bank loan so we are going to list them here for you. 

• The process is often quicker and simpler when going through a dealer.   

• Dealerships also have more leniency when it comes to credit scores, meaning those with lower scores may still be able to qualify for financing.   

• There is more room for negotiation. Remember the car dealer wants you to drive away in a new car that day so they will likely be more willing to listen to your offers.  

• Dealerships have access to direct deals and promotions offered by the auto manufacturers themselves.  

All of these factors can make securing a loan through a dealer much more attractive than going to a bank or other lender.  

Disadvantages  

There are a few disadvantages to getting a dealership loan as opposed to a bank loan.   

• They usually come with higher interest rates. This is because the dealership is essentially acting as a middleman between you and the lender. They want to make sure they get paid for their services, so they tack on an additional percentage to the interest rate.  

• The approval criteria in some cases can be stricter.  

• You’re essentially working on the dealership’s schedule when it comes to repayment. This means that if you miss a payment or are late, they have the right to repossess your vehicle.   

• They often require larger down payments than banks or other lenders.   

• Many dealerships do not offer flexible repayment options that may be available from other lenders. 

 How Does a Bank Loan for a Car Work?

This type of financing works much like any other loan type you can get from a bank. When getting an auto loan through a bank vs. dealership all you need to do is visit your chosen institution and apply for a car loan. On the application, you will need to provide various personal information as well as some other documents like an ID and statements about your income, debt, and current employment.  

With a car loan from a bank vs. a dealership, you’ll usually get a lower interest rate. Another key difference is that, when you take out a bank loan, it will be in your name only. This is important to remember if you ever want to sell the car or refinance the loan. If you have a loan through the dealership, they will likely be listed as a lienholder on your car’s title.  

With a bank loan, you may be able to shop around for the best deal. You can compare rates and terms from different banks before making a decision.   

And lastly, banks will look at your whole picture first, and then put together a loan program that suits your needs. Once that is in place, you are armed with the right information you need before choosing the best car for you. While dealerships often try to hook you on a car you love that may be more than you can afford, setting you up for disappointment. A bank, on the other hand, will work to prevent such a situation, because they do better when you can make all your payments.  

Advantages  

• Banks are more likely to offer low-interest rates on an auto loan.  
• They can be a good option if you need a larger loan.  
• Longer repayment terms result in a lower monthly payment.  
• More flexibility when it comes to the repayment schedule.  
• A bank isn’t there to pressure you to buy a car. 
• With a bank, you can get pre-approved for a loan and know what to expect.  

Disadvantages  

• You may have to visit a physical branch or submit your application in person.  
• Stricter requirements regarding a credit score. You also might not qualify for a loan at all if you have poor credit.   
• There is a lot less room for negotiation of the loan terms.

Which Car Financing Option is the Best?

There are a few different options when it comes to financing a car. You can always choose between dealership finance vs. bank loan, so, which is the best option?  

Dealership loans are typically easier to qualify for than bank loans. However, they often come with higher interest rates. This means that you’ll end up paying more money in the long run.  

Bank loans, on the other hand, usually have lower interest rates. Additionally, they can be more difficult to obtain especially if your credit score isn’t in a good range. 

Ultimately, it’s up to you to decide which financing option is best for your situation. If you have good credit, you may be able to get a better deal from a bank. But if you need easier financing and a faster process, a dealership loan may be the way to go.