Reason #: A Dealer May Mark Up Interest Rates
With dealer-arranged financing, the dealer essentially shops around for you, gathering different offers from financial institutions such as banks, credit unions or the automakers finance company. But the dealer may raise the interest rate of the loan they present to you.
This markup compensates the dealer for handling the financing and could result in you paying hundreds or thousands of dollars more over the life of the loan. Lenders may allow dealers to add up to 2.5% to the interest rate, according to the Center for Responsible Lendings November 2015 report titled Road to Nowhere: Car Dealer Interest Rate Markups Lead to Higher Interest Rates, Not Discounts.
Lets say a lender quoted a 4% interest rate on a $30,000 loan with a 60-month term. Over the length of the loan, youd pay an estimated $3,150 in interest. But if the dealer marked up the interest rate to 6.5% on that same loan, youd end up paying an estimated $5,219 in interest a more than $2,000 difference.
If the dealer quotes you a rate thats significantly higher than other auto loan rate estimates youve received, consider trying to negotiate the rate with the dealer.
Getting Financing Through The Bank
Borrowers often get the best rates by securing financing from their own banks. The process works differently with different institutions, but everyone begins by applying for the loan online or in person.
Some banks provide pre-approval authorization. This lets borrowers and dealerships know how much the person is eligible to borrow. Others actually provide people with the funds. Then, they write the dealership a check for the price of the vehicle. The bank then formalizes the loan, and the borrower begins making monthly or bi-monthly payments. Customers can get excellent rates this way, especially those with the best credit scores.
Dealer Finance Vs Online Lenders
If youre crunched for time but want to compare your options, an online lender might be the way to go. You can typically pre-qualify with an online lender in a few minutes, which will give you a ballpark idea of your rates, and once officially approved, you can often get your money as soon as the next day.
Some online lenders might already have a partnership with your dealer. In that case, the dealer might get the funds for you directly and you can sometimes even drive away in your car as soon as you sign your papers. Applying through a dealership is generally faster and involves less work on your part.
Online lenders are especially useful if you have less-than-perfect credit. Online car loan providers can offer faster funding for people with damaged credit or who are new to auto financing. This option is often the most flexible and easy to use, providing you with a selection of lenders who have already pre-approved you after filling out a quick online application. Some can also help you find a car at a dealership.
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The Benefits Of A Car Loan
- More negotiating power When you are dealing directly with a broker or the lender then you are in a position to negotiate the payment structure and quite possibly the interest rate .
- More wiggle room To the bank loan officer youre more than a name on a balance sheet. Talking to and dealing with the lender could give you a little leeway in the future should there be any issues with late payments or a mix up with direct debits.
- Better interest rates Dealers offer their own interest rates which are sometimes a markup on the banks rates. Get a car loan with the bank, and youll get the best deal possible.
- Even more negotiating power This time with the dealer. A lender can prequalify you for a loan telling you how much you can expect to borrow. This is a great advantage when talking to the dealer as you no longer need their assistance to finance the car.
To learn more about the benefits of a broker, we’ve put together a helpful guide.
Benefits Of Dealership Financing
The major benefit of using a dealership to finance your vehicle is convenience. You wont 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.
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The Main Difference Between A Car Loan Vs Dealer Financing
The main difference between a car loan vs financing from a dealer is in how you apply. If you borrow through your dealer, theyll typically send your details to multiple lenders to see which ones will approve your loan. With a car loan, you apply directly with one lender and can even get a quote on your rate before you submit your application.
Because dealerships have a relationship with these lenders, they might have room to negotiate. However, you wont be able to compare lenders yourself and could potentially find a better deal if you took control and applied for a car loan yourself.
Car loan vs dealership financing: a breakdown
Bank Vs Dealer Financing
When you are trying to decide whether you should go with dealer financing or bank financing, you are going to have to look at several different factors. Here are a few things to consider about bank vs. dealer financing when it comes to purchasing a car.
Many people are enticed to use dealer financing because of incentives that are thrown out by the dealer. For example, you might hear an ad from the dealer that says you will be able to get 0 percent interest on a loan. Sometimes, these incentives can potentially save you some money. However, you need to pay attention because many of these incentives are not as great as they make them out to be.
Even though the car dealer might be able to offer you some type of financing incentives, they are going to most likely make up for that in some other area. If you work with a dealer to finance your car, you are not going to be able to see what is going on behind the scenes. They are going to be in control of the trade-in process with your old car, the purchase price of your new car, and the financing. When you combine all of these three variables into one package, there is a lot of room for the dealer to make up money. Instead of letting the dealer handle everything in one big package, you need to work on each portion of the deal separately. This will allow you to stay on top of the deal and avoid being taken advantage of.
Which Is Better?
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How Much Does Credit Score Matter
Your credit score is one of the biggest factors in determining what kind of loan offers youll get. The higher your score, the lower your interest rate will be, and vice versa. If you have a poor credit score, youll be considered a subprime borrower and it will be difficult, but not impossible, to secure financing.
If your credit score puts you in this category, you might want to consider getting someone with a better credit score to co-sign with you, or put off buying a new car until you can pay off other debts and increase your score.
As for how much applying for a loan will affect your credit score, the truth is that whenever lenders run a hard inquiry to check your credit, it will ding your credit score slightly. But when youre applying for car loans, even if multiple lenders check your credit, it will only count as one hard inquiry as long as they do it around the same time.
Auto Financing Through A Bank
Going through a bank or credit union when financing a vehicle will take some prep work upfront, but it can pay off with substantial savings over the lifetime of the car loan. You’ll want to approach one or more banks prior to going to the dealership to get pre-approved for your auto loan. Preapproval means that the bank will give you a loan amount and interest rate to purchase a new or used car and you can bring that offer with you to the dealership.
The key benefit of taking this route is that you give yourself the opportunity to compare loan offers from multiple banks and also compare the bank’s rates to what is offered at the F& I office at the dealership. This route allows you to take your time and shop around for the lowest APR or the best loan terms.
There is a good chance you’ll find a better interest rate at a bank compared to the dealership because banks do not have a markup for interest rates. Some dealerships will charge you a higher rate than the lender offers and take a cut as commission. You’ll improve your odds of getting favorable loan terms and interest rates if you have an existing relationship with the bank or credit union, and some credit unions are more flexible about lending to car shoppers with compromised credit.
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Banks Vs Dealer Financing
A lot of dealer financing ultimately comes from banks, so there might not be as much of a difference between the two as you think. However, one plus for banks is that they do not have the markup rate that dealerships do. Because dealerships usually work with outside lending institutions to provide buyers with loans, dealers usually mark up the interest rate of these loans to make a profit. If you work directly with a bank, though, you eliminate the middleman and might save yourself some money.
You can even apply for a personal loan from your bank to purchase a new car. This is a relatively hands-off experience, and only applicants with good credit typically qualify. This route is often nicknamed direct lending. If your credit score is in tip-top shape and youre in good standing with the bank, you can score a competitively low interest rate, especially if youre willing to secure your loan with your car.
On the downside, banks are typically less negotiable than dealerships when it comes to discussing interest rates or loan terms. It might be harder to get a loan approved directly from a bank if you dont meet certain criteria
Whats The Difference Between Dealer & Car Finance
Dealer finance is when the dealer contacts their preferred bank or financier and helps you arrange a loan for the car via them. They make all the arrangements while you do very little. Sounds ideal doesn’t it?
A car loan is when the buyer applies for a loan with a broker like us, or direct from the bank, credit union, or a finance company. You arrange all the details of the loan yourself. You then use the money to purchase the car from the dealer for cash.
The common feature between both dealer finance and a car loan is that all loans will have similar components you need to compare the interest rate, the comparison rate, the term and the repayments. It’s important to consider and compare your options. To help you with this process, we’ve make it easy to compare our interest rates to the Big4.
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Car Financing Through A Bank:
Getting a car loan through a bank is a sound option for many people, particularly if you go through a bank that already has your business. Since they know you and have a relationship with you, they may be willing and able to offer you a lower interest rate than a dealership. The bank may even offer incentives to financing with them if you do all your banking under their roof.
When financing a car through a bank, you have the advantage of shopping around at various institutions in order to get a competitive deal or terms that best align with your budget and credit profile. In addition, you stand a better chance of working with a real and accessible customer service representative when you need one.
Another important pro to financing through a bank is that you will avoid surprises. Banks will look at your whole picture first, and then put together a loan program that suits your needs and that they are confident you can see through payoff. Once that is in place, you are armed with the right information you need before choosing the best car for you. While dealerships often try to hook you on a car you love that may be more than you can afford, setting you up for disappointment , a bank will work to preemptively prevent such a situation, because they do better when you can make all your payments.
Reason #: A Bank Can Preapprove You For A Car Loan
Some banks offer you the ability to apply for preapproval for an auto loan. If youre preapproved, the bank will let you know the loan amount, rate and terms youre conditionally approved for.
Keep in mind that preapproval isnt a guarantee of loan approval or that youll receive the same estimated rate and terms youll still need to finalize and submit your loan application. But it can give you a good idea of the terms you may be approved for by various lenders so that you can find the best deal.
Its worth noting that some automakers finance companies also offer the ability to apply for preapproval but youll be limited to buying one of the automakers vehicles. For example, if youre preapproved for a loan from Lexus Financial Services, youll only be able to use that loan to buy a Lexus at a participating Lexus dealership.
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Example: Dealer Financing Vs Car Loan
Who saved more money?
Clay only earns $35,000 per year and has been carrying a balance of several thousand dollars on his credit card for a few years now. He gets turned down for an auto loan from the bank, so he begins hunting around for a dealership that will finance his car. He finds 2 rival sellers who are both willing to procure a loan for him.
Using the first one’s offer, he successfully negotiates a better deal with the second seller. Happy to keep Clay from giving his business to a rival dealership, the seller offers him a 72-month loan with no down payment and a 4.5% interest rate. Clay accepts and drives away with his new car. In the end, he only pays $359 per month in repayments and a grand total of $3,231 of interest over the whole term of the loan, bringing his overall amount to $23, 231.
In the end, Clay will pay $71 less than Julian without having to make any bulk payment upfront and with a cheaper monthly repayment. Not bad for a guy with a much smaller salary and a higher debt load. It’s true that Clay is stuck paying his loan off for a longer time than Julian, but it’s also true that Julian would be unlikely to convince the bank to give him the interest rate that Clay is getting.
* This is a fictional, but realistic, example.
Getting A Bank Loan Through The Dealership
Consumers who dont want to use their own bank have the option of letting the dealership arrange financing for them. The dealership isnt actually offering the financing. Instead, it reaches out to banks on behalf of the consumer. It typically has relationships with a variety of banks. Some of those banks only offer loans to people with stellar credit, while some extend financing to people with less-than-perfect credit.
Dealerships dont do this out of the goodness of their own hearts or just to move vehicles. They do it for the kickback. The kickback is referred to as the dealer reserve, and it can add two to four points to the interest rate.
That means someone with excellent credit might end up paying five percent interest instead of three percent. That can add up to lots of extra money over the course of the loan.
Many people dont realize theyre paying a kickback when they go through the dealership. They dont realize the dealer has marked up the interest. They could end up with a much better rate if they went to the bank directly.
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Which Type Of Car Financing Is Right For You
dealer financing is an attractive option
|Christopher WalshMoneyHub Founder||MoneyHub’s Top Car Finance Options – Avoid high interest rates and high fees with three trusted lenders.|
Bank Financing What You Need To Know
Consumers can get an auto loan through a bank in one of two ways. First, they can go to their own bank. Second, they can get a bank loan through the dealership. The dealership will send their information out to various banks, and the consumer will then be able to select a loan.
Lets look at both options.
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