Why car loans from banks may be a better option than dealership loans


In a Nutshell

When you’re shopping for a car, you might be more focused on the car’s make and model than where to find an auto loan. But don’t assume the dealer’s financing will be your best option. You might be able to save some money by getting a car loan from a bank instead.

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You shop for the best price on a car — so it only makes sense to shop and find the best loan rate and terms, too. Generally, you’ll have two options: a loan from the dealership’s financing department, or a car loan from a bank, credit union or online lender.

Comparing your options can help you find the best car loan for your circumstances. You may be offered a similar interest rate, terms and fees whether you apply for a loan from a bank or through a dealer, but you won’t know unless you look at all of the options available to you.

Here are a few reasons that a car loan from a bank might be the better option.

A bank won’t pressure you to buy a car

Although the salesperson might hand you off to someone in the finance department to close a deal, both people work for the dealership and want to sell you a car, which is no surprise, of course.

“Go to your bank first,” says Alexander Felice, a financial analyst at Meadows Bank who spent eight years in auto and bank lending and now runs a real estate–focused site called Broke Is a Choice. “Dealers will pressure you to close with them and not shop [for a loan]. It’s good to do your shopping first.”

Felice has seen people who go to a dealership, fall in love with a car and then make an emotional decision to buy it without comparing all their financing options. Instead, you could take some of the pressure and emotion out of your decision by getting preapproved for a car loan before you take a test drive.

A bank can preapprove you for a car loan

Getting preapproved for a loan from a bank or credit union means the lender has given you an estimate for the amount you may be able to borrow if you are ultimately approved for a loan. It’s important to keep in mind that the preapproval process doesn’t guarantee approval for a loan, but can help you understand what loan terms you could get.

You may be able to apply for preapproval online, over the phone or at a branch. When you do, you’ll likely need to share information about your finances, desired loan amount and whether you plan to buy a new or used vehicle. The lender may also review your credit with a hard credit inquiry, which could lower your credit scores by a few points.

Wait until you’re ready to buy a car before beginning the preapproval process, since a hard inquiry typically won’t impact additional loan applications that you submit within 14 to 45 days. That means various hard inquiries can count as one, as long as they’re made within that timeframe.

Once you’re preapproved, you’ll have an idea of the amount you can borrow, which can help you set a budget. But keep in mind that just because you’re approved for a large loan doesn’t mean you should borrow the entire amount.

Buying a car: How much can you afford?

Being preapproved for a car loan can also give you a leg up when you get to a dealership.

  • The preapproval amount is the maximum you can spend. Use this maximum as a reason to walk away from a pushy salesperson and say no to upsells.
  • When you’re preapproved, you may have a stronger standing in negotiations. Let the salesperson know you’re looking into financing elsewhere — this way, you can avoid any discussion about it.
  • The dealer may try to beat your preapproval offer to win your business.

Dealers may mark up interest rates

Dealers’ finance managers can act like brokers, shopping around and quickly showing you different offers from banks and credit unions, including financing companies that the manufacturer owns, Felice says. But the dealer may add a markup to your loan’s interest rate for arranging the financing.

In the end, if you’re offered a lower rate even with the dealer markup, then you might be better off with dealer financing. However, applying for a loan directly from the lender might help you get a better rate.

Either way, Felice recommends shoppers “buy on total amount financed rather than focusing on the monthly payment.” In other words, compare the total cost, including fees and interest, of each option rather than your monthly payments.

While a longer loan term with lower monthly payments might be enticing, you’ll pay more in interest overall.

Should I get a car loan that’s longer than five years?

You likely won’t find a 0% APR offer

A 0% APR car loan from a dealership can seem like the most appealing option. But these financing deals are generally only available for buyers with excellent credit who are buying a new vehicle and getting dealer financing.

Also, a 0% APR financial deal also may only apply to shorter loan terms of, say, 36 months.

Bottom line

Dealer financing can make the most sense in certain situations, such as when you’re buying a new car and you have excellent credit. But dealers’ financing departments will often send your application to several banks and credit unions to find you a loan offer, and then mark up the interest rate. You may be better off going directly to a lender yourself. Even if you wind up with the same rate, it’s definitely worth checking and may take some pressure out of the car-buying experience.