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After determining which color, make and model you want for your future vehicle you must decide how you intend to purchase it. And if you are looking to finance a new car, you have quite a few options available.
One of these options is direct auto financing, which is when you get financing directly from a lender. While the process can vary by lender, consider the benefits before determining if direct financing is right for you.
What is direct auto financing?
Direct auto financing is a type of car loan that is readily available through online lenders, banks and credit unions. Its counterpart, indirect financing, is available through car dealers and loan marketplaces.
If you prefer a streamlined car buying and financing process direct financing could potentially be a hassle. Along with this, you may also have a hard time finding a lender that offers decent rates for no- and low-credit borrowers.
But dealer financing is not perfect either. Dealerships often have markups when it comes to financing — which you can avoid when you work directly with a lender.
Direct vs. indirect auto financing
In the case of direct financing, you’ll work with a bank, credit union or online lender on your own, which means you have the freedom to shop around to find the best deal. And once you’re preapproved, you can visit the dealership, pick out your vehicle, negotiate the best deal and sign the paperwork.
Indirect financing works a little differently. You’ll visit the dealership, select your ride and work with the dealer’s in-house finance department to secure an auto loan.
Despite having a guide through the entire process, there’s a major downside — the dealer will likely mark up the interest rate. So, it’s worth getting preapproved from an outside lender before shopping for a car and presenting it to the lender to possibly negotiate more favorable loan terms.
Another benefit to direct auto financing is the ability to shop around with lenders outside of what might be presented on the car lot. You can get quotes from several lenders and choose the best deal based on the terms, rate and other factors rather than simply taking what you’re matched with.
How direct auto financing works
The process of financing your car through a direct lender varies, but these basic steps will always apply.
1. Prequalify with multiple lenders
Prequalifying is like shopping around for quotes from lenders. You can choose from offered rates, loan terms and monthly payments among other features. Compare the rates offered by multiple lenders to make sure you’re getting the best deal.
2. Choose a lender and apply
Once you have prequalified with multiple lenders, you can choose the lender with the most favorable terms. You will likely need to provide proof of income, a Social Security number and a bank account number for verification in order to prequalify for a loan.
The lender will determine the loan amount they can offer based on your income, debt, employment and other factors.
3. Buy the car
You can then head to the dealership or shop around online. Since you already have financing lined up, you can shop like a cash buyer would.
4. Start making payments
You’ll need to begin making payments as soon as possible. Most lenders accept online payments, and you can sign up for this service by creating an online profile. You may also have the option to pay by mail or phone, but a processing fee may apply.
Where to find a direct lender
When you are looking for a direct lender, it is wise to start with institutions you already have an account with. If that is not an option, check out other sources of direct lending.
Check with your local bank or credit union
Many banks and credit unions offer direct auto loans — though they may have dealership limitations. If you have an account with that specific bank or credit union and are on good terms you may get a decent rate even if your credit isn’t perfect.
There are many online lenders that offer direct auto financing, like myAutoLoan or Capital One. Oftentimes you will be able to get financed the same day that you apply, and you don’t necessarily have to have a car picked out — depending on the lender.
Captive finance companies
Captive finance companies are in-house financing entities owned by auto manufacturers.
You can get vehicle lease and car loan options for cars made by their parent company. For instance, GM Financial offers both options for vehicles made by General Motors.
The bottom line
Financing your car through a dealership is one of the easiest ways to acquire financing for a new vehicle, but the right financing option for you depends on your circumstance. For example, if you already have an account with a bank or credit union, you may qualify for a lower interest rate through direct auto financing. Just be sure to shop around with at least three lenders to ensure you get the best deal on a new auto loan.