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When you’re shopping for a car loan, you generally have two options: a loan through a dealership’s financing department or a loan from a financial institution, such as a bank. In many cases, a car loan from a bank may be a better option.
Let’s take a look at some of the reasons a car loan from a bank may be preferable, as well as a couple of situations where getting a loan from a dealership might make more sense.
- Reason #1: A bank won’t pressure you to buy a car
- Reason #2: A bank can preapprove you for a car loan
- Reason #3: A dealer may mark up interest rates
- When is a car loan from a dealership a better option?
- Which bank is best for car loans?
Reason #1: A bank won’t pressure you to buy a car
It’s all too easy to head to the dealership, fall in love with a car and make an emotional decision to buy it right then and there without comparing your financing options. Dealers may even pressure you to finance through them so they can close the sale and receive compensation for arranging the financing.
Dealers may also offer a certain car price or loan terms if you finance through the dealership, or use tactics like lengthening your loan term to lower your monthly payment (though you’ll likely end up paying more interest over the life of the loan).
You can help take some of the pressure and emotion out of your decision by shopping around for a loan and applying for preapproval with various lenders, including banks, before you set foot in a dealership.
Reason #2: A bank can preapprove you for a car loan
Some banks offer you the ability to apply for preapproval. If you’re preapproved, the bank will let you know the loan amount, rate and terms you’re conditionally approved for.
Keep in mind that preapproval isn’t a guarantee of loan approval or that you’ll receive the same estimated rate and terms — you’ll still need to finalize and submit your loan application. But it can give you a good idea of the terms you may be approved for by various lenders so that you can find the best deal.
It’s worth noting that some automakers’ finance companies also offer the ability to apply for preapproval — but you’ll be limited to buying one of the automaker’s vehicles. For example, if you’re preapproved for a loan from Lexus Financial Services, you’ll only be able to use that loan to buy a Lexus at a participating Lexus dealership.
How to apply for preapproval
Depending on the bank, you may be able to apply for preapproval online, over the phone or at a branch. You’ll likely need to provide some personal information, such as your Social Security number and birthdate, as well as employment and income details. The bank may review your credit with a hard inquiry, which could ding your credit scores by a few points.
Wait to begin the preapproval process until you’re serious about starting your car loan shopping. Multiple hard credit inquiries within a time frame of 14 to 45 days will only count as one, so it makes sense to do them around the same time.
Once you’re preapproved and identify the loan that best fits your needs, you can head to the dealership with your preapproval documents.
Benefits of getting preapproved for a car loan
Being preapproved can give you a leg up at the dealership in a few ways. First, you can shop like a cash buyer at the dealership. Let the salesperson know you’re looking into financing elsewhere — this way, you can avoid any discussion about it and instead focus on negotiating the price of the car you want to buy.
The dealer may end up trying to beat your preapproval offer to win your business. If they do, going with dealer-arranged financing may be your best option. But you’ll never know if you don’t do the homework first by gathering estimated loan offers from various lenders and comparing them.
In addition, knowing how much you’re preapproved for can help you avoid spending more than you planned. The preapproval amount is the maximum you can spend (unless you have some extra cash stashed away). You can use this maximum to walk away if the dealer won’t negotiate with you, or to say no to upsells.
Reason #3: A dealer may mark up interest rates
With dealer-arranged financing, the dealer essentially shops around for you, gathering different offers from financial institutions such as banks, credit unions or the automaker’s finance company. But the dealer may raise the interest rate of the loan they present to you.
This markup compensates the dealer for handling the financing and could result in you paying hundreds or thousands of dollars more over the life of the loan. Lenders may allow dealers to add up to 2.5% to the interest rate, according to the Center for Responsible Lending’s November 2015 report titled “Road to Nowhere: Car Dealer Interest Rate Markups Lead to Higher Interest Rates, Not Discounts.”
Let’s say a lender quoted a 4% interest rate on a $30,000 loan with a 60-month term. Over the length of the loan, you’d pay an estimated $3,150 in interest. But if the dealer marked up the interest rate to 6.5% on that same loan, you’d end up paying an estimated $5,219 in interest — a more than $2,000 difference.
If the dealer quotes you a rate that’s significantly higher than other auto loan rate estimates you’ve received, consider trying to negotiate the rate with the dealer.
When is a car loan from a dealership a better option?
In some cases, a car loan from a dealership may make the most sense for you — but it’s still worth shopping around before you decide.
If you qualify for 0% APR financing or other incentives
If you qualify for 0% APR, or annual percentage rate, financing or other incentives — such as car rebates or bonus cash — that some dealers offer, you might find that getting an auto loan through the dealership is the least expensive financing option. But be aware that you typically need excellent credit to qualify for these incentives, and you’ll likely need to get your loan through the automaker’s finance company.
If you have less-than-perfect credit
While some banks consider applicants with less-than-perfect credit, you may find that getting approved for financing through a dealership is easier. Dealerships usually have relationships with a variety of finance companies and may be able to secure financing for you. Some dealerships even have special financing departments dedicated to helping people with lower credit scores get financing.
A word of caution: Some dealerships offer “in-house financing” and target people with poor credit. These dealers act as their own banks, which means your loan will come directly from the dealership versus from a bank or credit union that has a relationship with the dealership.
Also known as buy-here, pay-here financing, the loans these dealerships offer can come with high interest rates. Consider a buy-here, pay-here dealership as a last resort, after you’ve exhausted all other financing options.
Which bank is best for car loans?
The best bank for you will depend on a range of factors, including your financial situation and the type of vehicle you want to buy. But here are a few banks that stand out.
Bank of America
Bank of America offers a range of auto loan options, including financing for lease buyouts and private-party purchases. For those who qualify, the bank offers a low starting interest rate. And if you’re a Preferred Rewards customer, you may be able to get a discount of 0.25% to 0.5% on your rate. Keep in mind that qualifying for these discounts requires a three-month average combined balance of at least $20,000 in your Bank of America bank or Merrill investment accounts to qualify for the lowest (0.25%) discount and at least $100,000 to qualify for the highest (0.5%) discount. It’s also worth noting that if you plan to buy from a dealership, you’ll be limited to franchise dealerships and a few independent dealers: CarMax, Carvana and Enterprise Car Sales.
Read our Bank of America auto loan review to learn more.
Capital One Auto Finance
Capital One Auto Finance may consider you for an auto loan if your credit isn’t perfect. And the bank makes it easy to see estimated loan terms without affecting your credit scores by offering the ability to apply for prequalification. But like Bank of America, Capital One has restrictions on where you can buy a car. You’ll be limited to shopping at one of Capital One’s partner dealerships.
Check out our Capital One Auto Finance review for more details.
LightStream — a division of Truist Bank — also offers a range of vehicle loan options, including private party, classic car and lease buyout loans, as well as motorcycle and RV purchase loans. With its Rate Beat program, LightStream will beat a competitor’s interest rate offer by 0.1 percentage point if certain conditions are met. This lender also provides funding quickly — LightStream will deposit your loan funds into your account as soon as the day you apply, in some cases.
Read our LightStream auto loan review for more info.
U.S. Bank offers the same interest rates for both new and used cars up to six years old. This is rare — rates for used-car loans are typically higher than for new-car loans. The bank allows you to apply for preapproval online, but you’ll need to head to a bank branch to complete your application. This means that if you don’t live in one of the 26 states where U.S. Bank has branches, you won’t be able to apply.
Read our review of U.S. Bank auto loans to learn more.
With banks, credit unions, online lenders and dealerships all offering loans, you could have a lot of auto financing options.
Take the time to shop around, apply for preapproval and compare estimated loan rates and terms. Then, once you find a car at the dealership, see if the dealer can beat your best loan offer. Read our article on how to negotiate your car price for more tips to help save money on your auto loan.