Parents with a growing family may be gearing up to buy that minivan, while young couples may want to save on monthly payments for the cool sports car they bought when they got married.
Whatever your reason for buying a new car or refinancing the one you’ve got, it’s important to consider whether you’re better off going to your dealership or to a bank to help you finance the loan. In the past, you may have automatically turned to your dealer because it seemed a quicker and more convenient way to get through the process; seven out of 10 auto loans are made through car dealerships, according to the National Automobile Dealers Association.
But is that really the best route to take? Not necessarily.
Benefits of a Car Loan From the Bank
Let’s see why financing your auto loan through a bank might be a better option for you:
The fun part of shopping for a new car at dealerships is taking different models out for a spin. Things get pretty stressful from there—after all, this is a big financial decision, one that you know is going to require that you get a loan. (85% of new passenger vehicles are financed with loans or leases.). No matter how many times you’ve financed through a dealership before, it’s not unusual for negotiations with dealers to trigger a stress response of some kind.
When you decide to finance through a bank, you can stress less—you’re walking into the dealership with a pre-approved loan and valuable knowledge. You’ll know the total amount you can spend and the interest rate and repayment terms, too. A pre-approved check in hand effectively makes you a cash buyer, giving you more room to negotiate favorable pricing. Banks can also often provide more flexible payment options, such as borrowing with no down payment required, and repayment terms
The rate you’ll get from a bank will be the true interest rate—no dealership markups for setting up the loan through a bank for you. That’s no small consideration as the dealership may make more money with a marked-up interest rate than the profit they make from the sale itself. Not only that but as middlemen, dealers may not submit your application to the banks that offer the best rates but to those whose terms will help the dealership make more money.
Pre-Established Relationship Benefits
If you’re already a bank’s customer, you may be eligible for an expedited loan approval process, making it as efficient to deal with a bank as you think it is to work with a dealer. A relationship history is a consideration when banks make lending decisions. They may provide other courtesies to their customers, as well, like rate discounts or a monthly service charge waiver. Some banks offer some of the same benefits to customers who want to refinance their car loans in order to lower their interest rates and reduce payments or to more quickly pay off a loan. Customers who agree to make automatic payments through their checking account also may qualify for interest rate discounts for new and eligible refinance loans.
If you decide to go the bank route, consider choosing one that has not only a digital presence but a real-world one for in-person customer service.
One thing to be aware of when looking for rates from banks is every time you apply for a loan, the lender runs a hard inquiry on your credit report to check your credit history. That may knock a few points off your score. You can take precautions to avoid this, like limiting your loan shopping to a two-week period, which means multiple applications will count as a single inquiry.
Getting a Loan From the Dealership
Dealership/manufacturer financing may still be worth considering for some consumers. Here are some reasons why:
Personalized Financing Plans
Major car companies (Ford, GM, Toyota, FIAT) have captive finance subsidiaries that their dealers can tap into. In most cases, captive finance companies can deliver more personalized financing plans tailored to budgets and repayment time terms as well as provide financing for customers who can’t get loans from other financial institutions because of credit or income issues. And if you have excellent credit, you may score premium benefits by securing a new car loan this way, such as 0% rates or cash bonuses.
Added Incentives and Special Offers
Manufacturers may provide incentives like 0% interest on outgoing model-year cars to move them before the new model debuts. Dealers may take money off the list price of new cars or offer other incentives such as holdbacks—which let you buy a car for less than the invoice price—to help them sell slower-moving models.
You can sign on the dotted line for dealer or captive finance loans for a new car to take advantage of any special offers, like loyalty discounts with cash rebates or discounts on bundled options, that are available at buying time. And then you can turn right around and refinance the loan to lower interest rates or extend the loan term.
Precautions to Take with Dealership Loans
In the case of captive financing, having bad credit may not disqualify you or a loan, but you should expect higher rates. And they can be much higher—in some cases, it can be more than twice as much as other lenders.
You should also take care that you have all the facts before you accept a dealer’s offer to take possession of your new car before your loan is approved. The dealership may come back later to tell you it can’t make the loan at the agreed-upon terms, which can lead to a loan renegotiation that leaves you paying a higher interest rate, making a larger down payment or some combination of the two. Don’t just assume the finance and loan rate is final.
Finally, there is the possibility that a dealership will try to increase your car payment by packaging products or services you didn’t ask for, like extended warranties, into the financing. You probably won’t notice as the dealer may present these capabilities as if they are all included with the vehicle rather than things you are paying extra for. So, don’t just focus on the monthly payment—get the details on the sales price of your vehicle, the total amount financed, the term and the interest rates.
When it comes to buying a car or refinancing one, a prepared consumer is a smart consumer. So, whichever route you decide to go, have a good handle on the benefits you can expect or negotiate for as well as the potential risks to keep in mind.