If you’re borrowing money to buy a car, there are two common alternatives. One is to arrange financing through the dealership where you make the purchase, and the second is to apply for a loan from a financial institution, such as a bank or credit union.
On the surface, these two options might seem strikingly similar. In terms of the nuts and bolts, they basically are: you borrow a sum of money and agree to pay it back, along with some interest, over a fixed term.
There are, however, some important differences between dealer financing and getting a car loan from your bank or credit union. Understanding the differences could help save you money on your car purchase and might even make the whole experience a little more pleasant and straightforward. One alternative isn’t always necessarily better than the other, with the right choice depending on your personal circumstances and situation.
Here’s a closer look at how dealership financing compares to credit union car loans, and which choice might be right for you.
The big difference: who does the work
The main difference between dealer financing and credit union financing is who does the legwork. To get a car loan from a financial institution, you have to shop around for the best rate and apply yourself. At the dealership, however, their financial representatives do the heavy lifting, assessing your credit, comparing available rates from multiple lenders, and organizing the loan on your behalf, although without your consultation. In some instances, a dealer may mark up the interest rate they offer you, their way of getting something in return for arranging the financing. The bad news: even a quarter point rate difference could end up costing you thousands of dollars in additional interest over the loan term.
Take the pressure off by getting pre-approved
Car buying tends to come with a lot of emotion, and sometimes includes an unpleasant dose of pressure sales tactics. One way to keep some of that pressure at bay is by obtaining a pre-approval on a car loan from your credit union or financial institution before you ever take your first test drive. Although the interest rate offered in a pre-approved loan is not locked in, it will give you a rough idea of what to expect.
If you arrive at the dealership knowing how much your credit union is willing to lend you, and with a ballpark idea of the interest rate they’ll charge, you are armed with valuable knowledge that can inform your actions and decisions. First off, the loan amount can help deflect any attempts to upsell you to a more expensive model and gives you a reason to walk away if a dealer won’t budge on pricing. Additionally, having a preapproval gives you a perfectly good reason to turn down any dealership that pressures you to accept their financing, because you already have a better option.
Go to the source, and go with who you know
If you arrange a car loan from the same credit union or financial institution you use regularly, your existing relationship might help you get a better deal. Leveraging these relationships with financial institutions can be especially important for buyers with poor credit.
Another potential benefit or arranging financing through a bank or credit union is that there’s no middleman involved. You are getting a loan directly from the institution, rather than having a dealership arrange it with someone else, and possibly charging you extra interest in exchange for that service.
When it might work to go with the dealer
From time to time, auto dealerships offer special interest rates on specific models, or cars of a certain age (often newer cars). In some cases, customers may be able to arrange dealer financing at 0 percent interest. Be cautious, however, that you don’t end up spending more than you intended on a vehicle just so you can qualify for a super-low promotional interest rate.
Buyers who have poor credit may also find it easier to obtain financing through a dealership, rather than haggling for a loan at their credit union or other financial institution. At some dealerships, staff specialize in finding financing for buyers whose credit scores are weak.
Remember: it’s not always about payment size
Generally speaking, the best loan is the one that costs the least to pay back, not the one with the lowest monthly payment. Don’t get sucked in by a dealership that offers you an extra-low payment amount if the trade-off is extending your loan term by multiple years. A shorter loan with higher payments might not sound so appetizing, but you’ll appreciate the difference if you can pay off your car three years sooner. Once the vehicle is paid off, you’ll be able to redirect your monthly payment into savings, investments, or maybe even a vacation. Road trip, anyone?