auto

Tap a lender, not a dealer, for a car loan

Tara Baukus Mello If you are ready to buy a new car, don't wait until you're sitting at the dealer's desk to know your monthly payment. Instead, secure your car loan from an outside lender, whether it's a national lender, a local bank or a nearby credit union. Getting your loan from an outside lender has a variety of benefits. Take a look at three important reasons to shop around for a car loan from an outside lender before you head to the dealership to buy your next car.

Find the best auto loan rates offered in your area.

You may get a better interest rate. By applying for an auto loan outside the dealership, you are skipping the middleman. That means you can be sure the rate you are given by the lender is the rate you qualify for. In many states, dealers are allowed to add a small percentage to the lender's loan rate and to keep the difference. This is called a dealer markup, and in many instances it is legal. However, that cost is passed along to the borrower and completely unnecessary. Getting approved for a car loan before you visit the dealership allows you to compare the rates you got elsewhere with the loan rates the dealer is quoting, allowing you to see if you are really getting a deal.

You control how many inquiries are made on your credit score. When you complete a loan application at the dealership, he will inquire with as many lenders as he chooses. While lenders will look at your credit score and ignore other car-loan inquiries within the prior 30 days, the inquiries could result in a hit to your credit score if you try to get a different type of loan shortly thereafter.

The effects are relatively short term, but if you plan to soon apply for a credit card or a home loan, for example, the dip in your credit score could impact the loan's interest rate.

It helps prevent "nightmare" situations. Most dealerships are responsible companies that are not out to scam you, but they are also focused on making as many sales as they can. Every sale directly impacts the bottom line in the form of profits and goes toward manufacturer bonuses and incentives. As a result, dealers will try to make every sale they can, which sometimes means hedging their bets with lenders on which customers will get approved for car loans and at what interest rate.

Occasionally, a lender backs out of its initial car loan or comes back with a higher interest rate after the customer takes delivery of the car. Though it doesn't happen very often, these situations generally take a lot of time and effort to resolve. By getting preapproved for a loan from an outside lender, you'll know where you stand and can feel confident you'll avoid these nightmare situations.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

If you have a car question, email it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories. Follow her on Facebook here or on Twitter @SheDrives.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
CAR & MONEY NEWSLETTER

Get cost-cutting tips for buying, selling and maintaining your wheels. Delivered monthly.

advertisement
Partner Center
advertisement

Blog

Tara Baukus Mello

FTC targets deceptive car ads

The FTC has taken action against two car dealership chains for deceptively advertising the costs of buying and leasing cars.  ... Read more


Connect with us