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Why you should skip car loans from dealerships

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If you are buying a car soon, you’ll need to line up financing to ensure the transaction goes smoothly. You have the option to finance the car through your bank, credit union or an online lender. Or you can use in-house financing offered by the dealership.  

It can be tempting to get an auto loan from the dealership because it’s convenient and you can handle the entire transaction in one sitting. Still, you could be better off looking for financing elsewhere, as shopping around often opens the door to better deals.  

3 reasons not to get your auto loan from a dealership 

There are a few key reasons why you may be better off getting financing from a bank, credit union or online lender than from a dealership. 

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

If you go into the dealership 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 you need to negotiate a lower interest if you’d still like to explore dealer financing. 

The car salesperson’s attempts at convincing you to explore higher-priced vehicles will likely be unsuccessful as well. Some car salespeople entice customers with affordable monthly payments, when the reality is they simply extend the loan term to get you a “better deal” that costs more interest. But with a loan offer in hand, you can politely deny their request.  

2. Dealers can mark up interest rates  

When you finance through a dealership, they do all the legwork for you. So, it’s not uncommon to receive an interest rate that’s higher than what you could qualify for if you secured financing on your own.  

The difference in rates, or markup, is how the dealership is compensated for handling the financing portion of the transaction. Considering it’s relatively easy to shop around and apply for an auto loan, it may not be sensible to pay the higher interest rate.  

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

It’s not uncommon for banks and credit unions to give better rates to existing customers. However, dealerships view all customers in the same light, although having good or excellent credit means you’ll get better loan terms.  

You’ll typically get the best deal from credit unions. They’re 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 2.79 percent in December of 2021, according to the National Credit Union Administration. However, the same loan from a bank came with an interest rate of 4.71 percent.  

Is dealership financing ever a better deal? 

You will likely get an auto loan with a competitive rate through your bank or credit union. However, 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.   

Next steps 

When you’re ready to apply for an auto loan, check your credit score to avoid any surprises at the dealership. Also, 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 and are having trouble getting approved for a loan, it may be worthwhile to explore dealer financing. 


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Written by
Allison Martin
Allison Martin's work began over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews, Investopedia, Experian and
Edited by
Auto loans editor