Most auto dealerships enable you to finance through banks and credit unions, but some offer in-house financing. To get the best deal on a loan, you should check your credit score before inquiring at various banks and dealerships about lending. Knowing your credit score will help you avoid high interest rates and unaffordable car payments. After checking your score, you can give yourself an advantage as a buyer by shopping around for the lowest rates available.
The Advantages of Financing Through a Bank
Most auto loans come from banks and credit unions, whether directly or indirectly through a dealership. One advantage of financing directly through a bank is knowing that a third party hasn’t raised your interest rate for added profit. While most dealerships will be transparent in their negotiations with you, many car sellers earn part of their income through extra financing charges on auto loans. You can avoid this pitfall by financing directly through a bank.
It’s also handy to have a pre-approved loan amount available while you’re shopping for a vehicle. That way, you can tell the dealership about the specific amount of money you have to spend before you start negotiating. If negotiations go too high, you’ll have an easy way out. You’ll also have a convenient excuse to turn down any offers you don’t want.
The Disadvantages of Financing Through a Bank
Financing through a bank may not give you the best rate available. While banks and dealerships use similar methods of calculating interest rates, some dealerships can beat a bank’s best offer. Some dealerships can offer promotional 0% interest rates. After an introductory period, these rates increase, but your initial payments will go entirely toward the principal. Buyers who can pay back the loan before the introductory period expires will receive the loan at no cost.
The Advantages of Dealership Financing
Dealership financing is quick, easy, and convenient. It’s often as economical as financing through a bank or credit union. Some dealerships offer in-house financing, so the process may be identical to applying for a bank loan. Dealerships with in-house financing may offer lower interest rates than banks or credit unions. Because dealerships specialize in lending to car buyers, in-house financing could save you money.
Dealership financing may be the best option for buyers with bad credit. Many dealerships offer subprime financing with no credit check, but these deals can be expensive. For buyers with bad credit, subprime dealership financing may be the only option. These buyers can minimize their risk of defaulting by choosing an affordable vehicle and making a large down payment.
The Disadvantages of Dealership Financing
Sometimes, the dealership is the middleman in an auto loan. In this case, you can reduce your overhead costs by financing directly through a bank. During your negotiations, a dealer may offer you several financing options and loan terms. Without shopping around for financing beforehand, you won’t know if your dealer’s offers are the best available.
Another disadvantage of dealership financing is that your loan principal could increase during negotiations. If your seller persuades you to include upgrades and add-ons in your purchase, you’ll pay for them with a larger loan. Your monthly car payments may become only slightly higher, but interest charges could significantly increase your expenses over the loan’s lifetime.
Financing a Car With Bad Credit
Buyers with credit scores below 620 can still finance their auto purchases. Interest rates for these loans will be much higher than prime rates, and subprime borrowers can pay considerably more for the same vehicle than prime borrowers. Therefore, it’s important for subprime borrowers to research financing offers before negotiating with a dealership. Subprime borrowers with enough time can save money by improving their credit and making a big down payment.
Not all car buyers have time to save for a large down payment or raise their credit scores. They can still get dealership financing with proof of their income, but they should expect high interest rates. Subprime borrowers who must finance a vehicle for work or school can minimize their costs by choosing an affordable vehicle and putting as much money down as possible.
Getting Pre-approved for a Loan
A pre-approved loan is a provisional offer of a loan from a bank. It isn’t the same as a loan, which is a transfer of money from a lender to a borrower. When you’re shopping for a vehicle, a pre-approved loan helps to narrow your choices to your price range. It saves time by telling dealers what you’re willing to spend so that they won’t try to sell you a vehicle you can’t afford.
A pre-approved loan still requires finalization, so the interest rate and principal could change when the bank runs a hard credit check. The bank will give you a printed document showing the details of your pre-approved loan. While you’re shopping for a vehicle, this document will help you sort your choices into a realistic set of options. You’ll have a general idea of what your car payments will be and how long it will take to repay the loan.
One fact to bear in mind is that every hard credit check will lower your credit score by a few points. A lender can’t make you an offer without running a credit check, so this process could leave you with a slightly lower credit score. The good news is that all these credit checks will count as only one inquiry if they happen within a 14-day period.
Preparing to Finance a Vehicle
With pre-approval from several banks, you’ll have an idea of the offers available to you. Shopping around for the best rates is important because they can vary from one lender to another. Subprime borrowers should exhaust all their options for financing before stepping onto a dealer lot. Many borrowers with subprime credit may not realize that they’re eligible for an auto loan with reasonable terms.
Even if you prefer the convenience and simplicity of dealership financing, you may still benefit from a pre-approved loan. By spending a few days shopping for loan offers before visiting a dealership, you’ll know when the dealership’s offer is worth accepting. With a pre-approved loan document from a bank, you’ll have an easier time negotiating favorable financing terms from your dealer.
Making a Final Decision
Whether you should finance through a bank or dealership depends on the offers you receive from each one. Some dealerships can make the best offers because they specialize in auto lending and provide in-house financing. Shopping for pre-approved loans before visiting a dealership will help you know if you’re getting a good deal or you should keep looking.
Buyers with subprime credit may have no choice but to finance their purchase through a dealership. In these cases, the dealer will have an incentive to offer the buyer only the most affordable options. These buyers should accept an offer only if it gives them a monthly car note they can afford.
For your next vehicle purchase, get the best interest rates you can find by shopping for loans from various lenders.