You have two options when you need a car loan: financing a car through a dealership or getting a loan from a third party.  

Even with options for third-party financing growing, dealerships’ captive lenders still provide a quarter of all financing, according to Experian. One major perk is the inherent convenience that dealership car loans offer. They can be seamlessly handled alongside your vehicle purchase. 

But you will generally be better off with a loan from a bank, credit union or online lender. Not only will it let you negotiate the car price better, but you’ll likely find a better deal on interest.

4 reasons not to get your auto loan from a dealership 

Getting preapproved for a car loan from a direct lender will aid you in negotiation, save you time and likely get you a better interest rate than you would qualify for at a dealership.

1. You can save time at the dealership and negotiate more effectively 

If you go into the dealership already preapproved for an auto loan, you will save time and have more sway during negotiations. In terms of saving time, you won’t have to fill out a loan application and wait for the dealer to shop your information around to lenders they partner with.   

Plus, you will have more leverage to negotiate the best deal on a vehicle without having to worry about financing. You may also have the leverage to negotiate a lower interest rate if you’d still like to explore dealer financing. After all, you can always reject a bad offer and go with the financing you have lined up.

Having a set loan amount will also help you say no to common dealer add-ons and upsells. You should always negotiate by total cost — not monthly payment — and you will have a firm budget if the salesperson tries to talk you into a higher-priced vehicle.    

2. Dealers can mark up interest rates  

When you finance through a dealership, they do all the legwork for you. It is not uncommon to receive an interest rate that is higher than what you could qualify for if you secured financing on your own. In fact, dealers frequently add a few percentage points onto your rate to make money off your loan.    

The difference in rates, or markup, is how the dealership is compensated for handling the financing portion of the transaction. Since it is relatively easy to shop around and apply for an auto loan, you don’t have to settle for a higher rate. You can use outside preapproval to your advantage, too. If the dealer can’t beat your rate, you can walk away from the finance office — and still leave with the car you want to buy.

3. You could get a better rate with your bank or credit union  

Banks and credit unions often give better rates to existing customers. However, dealerships view all customers in the same light, although having good or excellent credit means you should get better loan terms.   

You will typically get the best deal from credit unions. They are member-owned and focus on maximizing cost savings for account holders.   

In fact, the average interest rate for a 60-month new car loan from a credit union was 5.38 percent in March 2023, according to the National Credit Union Administration. The same loan from a bank came with an interest rate of 6.06 percent.

4. Online lenders also offer competitive rates

But even if you don’t qualify at a bank or a credit union, there are lenders that operate online. These frequently have competitive rates, even for borrowers with bad credit. Like banks and credit unions, most online lenders also have a preapproval process that lets you check your rates before affecting your credit.

Dealerships will also work to beat these rates. If it helps you boost your chances of scoring a good rate with dealership financing — or just avoiding hefty markup — it’s worth looking into online lenders as well as banks and credit unions. 

Is dealership financing ever a better deal? 

While you will likely get an auto loan with a more competitive rate through a bank or credit union, there are instances where dealership financing could be a better deal. 

  • The dealer offers promotional financing, as low as 0 percent APR (annual percentage rate), on select new models when you finance in-house.  
  • The dealership can match or beat the auto loan offer you received from your bank, credit union or an online lender.   
  • You have bad credit and can’t get approved for a subprime loan elsewhere.   

Even with these in mind, you should still apply for prequalification elsewhere before visiting the dealership. Most lenders will only do a soft pull of your credit — so you won’t see a dip in your credit score — and it will give you the opportunity to compare rates to what the dealership offers.  

Next steps 

When you’re ready to apply for an auto loan, check your credit score and research lenders to find the best options. Consider using Bankrate’s auto loan finder to view quotes without affecting your credit score.  

But if you don’t like the rate quotes you receive or have less-than-perfect credit, it may be worthwhile to explore dealer financing — and then refinancing later when your credit score has improved.