The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
When the time comes to purchase your next car, you must first decide whether you will go directly through your bank or the dealer itself to obtain vehicle financing. While they both leave you with the ability to drive off with a new car, they differ in experience, available rates and loan lengths.
How to decide between bank or dealership auto loans
Consider the potential benefits and downsides of both options before you apply for financing.
The primary benefit of going directly to your bank or credit union is that you will likely receive lower interest rates. Dealers tend to have higher interest rates, so financing through a bank or credit union can offer much more competitive rates. This is because dealers add a markup to the interest rate when they connect you with a lender.
Along with this, banks and credit unions have a wide range of products, which means that you’re more likely to find a financing option that works for you.
When you go through the dealership, you can take advantage of several perks that make the financing process easier. You will be able to use the dealership’s financing office, which cuts down the time you would spend shopping around with other lenders. Dealerships also often offer manufacturer deals, including rebates and other financing specials.
Auto financing through a bank
Financing through a bank can be a great option if you are looking to avoid dealer fees and feel confident shopping and comparing rates.
Benefits of bank auto financing
When done correctly, financing a car through a bank can be a great idea. Banks are more likely to offer low interest rates on an auto loan and can be a good option if you need a larger loan.
Drawbacks of bank auto financing
However, outside bank loans can take longer to process, and you might have to visit a physical branch or submit your application in person. You also might not qualify for a loan if you have a poor credit score. Consider the urgency of your vehicle loan and the health of your credit before deciding to finance through a bank or credit union.
How to finance through a bank
If financing through a bank is the right choice for you, you first will need to meet the eligibility requirements of your bank to qualify for a loan. Many banks will have an auto loan minimum and maximum, so check if your chosen bank will offer you an auto loan that fits your needs.
It is important that at this point you know what kind of car you intend to finance. This choice will greatly affect which lender is right for you. Try to find a lender that offers fee-free refinancing. That way, if your financial situation improves or deteriorates over time, you can adjust your loan without additional hefty costs.
Finally, you will need to get a car loan quote from the bank. During the quote process, you can decide on what term best fits your monthly budget and get an idea of the overall cost with interest.
Is bank auto financing right for you?
Borrowing money from a bank might be a good option if you need a larger loan amount, a low interest rate or a repayment term that lasts five years or less. Consider the drawbacks and advantages of bank financing before signing off and be sure to compare options.
Auto financing through a dealership
A dealership may be a good option if your credit isn’t in the best shape, and you don’t have a current relationship with any banks or credit unions.
Benefits of dealership financing
The major benefit of using a dealership to finance your vehicle is convenience. You won’t have to apply for financing through a bank and potentially wait days, or even weeks, for approval. Instead, you can simply go to the dealer and drive home behind the wheel of your new car.
Plus, if you have a co-signer, you can have that person come with you and make the buying process a little less stressful.
Drawbacks of dealership financing
The first drawback may initially seem like a benefit. Dealerships typically offer 60- to 72-month financing terms — sometimes with $0 down payment options. While these can make for a favorable monthly payment and initial costs, you will end up paying more interest overall.
You are also likely to get a higher interest rate. Dealership financing is more expensive than typical bank auto loans — even with the same credit score. This is because dealers both add a markup to the interest rate offered and are incentivized to send you to certain lenders, even if you could find a better APR elsewhere.
How to finance through a dealership
Dealerships work with large banks, online lenders and credit unions to offer auto loans through their own financing division. This means you will be able to finance your vehicle through a plan that the dealership has with a lender, and the dealer will handle much of the heavy lifting.
When you are approved for financing through your dealership, you will be directed to the dealership’s financing department to finalize the deal. This process will differ depending on the dealership, but you will likely need to fill out a few forms and submit your proof of income and assets.
Once you are approved, the dealership’s finance manager or a representative from the dealership’s auto lender will be able to help you review the loan details and finalize the loan.
Is dealership financing right for you?
Financing your vehicle directly through the dealership is the right option if you are looking to avoid the heavy lifting that comes with shopping for vehicle financing. It is also easier to qualify for, so if you have poor credit, financing through the dealership may be more accessible.
Tips for taking out an auto loan
Whether you are applying for your auto loan directly from the dealership or via a bank or credit union it is important to apply for prequalification and shop around.
If you are applying for financing through a bank or credit union, take advantage of the prequalification process. This process is typically offered online and is a great way to get an idea of how much you will be able to borrow. You will need your income, savings and other personal details on hand to complete the process.
Once you prequalify, shop around for a loan with the rate you were offered. Many auto loan rates are negotiable, and the same can be said for the fees and length of the loan. Many lenders will compete for your business, and you can use this to your advantage. Don’t settle for a lender who doesn’t offer favorable terms.
Both dealerships and banks can be viable options when it comes to financing your new car. But they each have their pros and cons, so be sure to shop around to find the best interest rate and repayment terms.