If you need to take out a car loan, there are two main ways to get financing. You can take out a loan with your bank or you can set up the financing through the dealership selling the car. Each option has pros and cons so you should consider both types of financing before making your purchase.
Bank auto loans
A bank auto loan comes straight from a bank or credit union. When you apply for a bank auto loan, the lender will go over your credit score and financial situation to decide whether or not you qualify for a loan and at what interest rate. There are two ways to apply for a bank loan. You can apply after you’ve found the right car, and hope that you’ll qualify for a loan that’s big enough. Or you can apply for a bank loan before you start looking at cars, known as a pre-approved loan. By getting a pre-approved loan, you’ll know how much you can spend on your new car.
Dealership auto financing
When you take out dealership auto financing, you’re applying for your auto loan through your car dealership. The dealership doesn’t actually loan you the money. Instead, the dealer will have relationships with a bank or multiple banks who will actually give out the loan. The dealer just collects your financial info to process your application with the bank. You’ll handle the application for your auto loan at same time as you go through the paperwork to buy your new car.
Bank auto loans pros
Bank loans are typically less expensive than dealership financing. By working directly with your lender, you’re cutting out the dealership middle man which lowers the amount you need to pay in fees. If you work with a bank that you already have an existing relationship with, that can also help you qualify for a lower rate and lower payments. Lenders prefer to work with existing customers who have been responsible with other loans.
Another advantage to using your current bank is that you can link up your auto loan with your online banking. This makes it easier to track your payments and manage your bills. Finally, getting a pre-approved bank loan gives you a set budget before you go shopping. This way you know you’ve got financing in place so you won’t run into the problem of finding a car only to realize you can’t qualify for a loan large enough to buy it.
Bank auto loans cons
While bank auto loans are usually better deals than dealership financing, they aren’t always the best. Sometimes dealers run special promotions that offer better financing than bank loans. Also, it’s up to you to handle the research with bank loans. If you want to get multiple quotes to possibly find a better rate, you need to handle these applications on your own. While research is definitely easier on the Internet, it still takes time to collect rates from different lenders.
Dealership auto financing pros
Dealership auto financing is convenient. You can apply for your car loan at the same time that you’re buying your car. This saves you the hassle of having to make a separate trip to the bank. Auto dealers also sometimes run special financing promotions to boost their sales. This often happens at the end of the year when they’re trying to clear inventory. If you can qualify for one of these special deals, you’ll getter a better loan from your dealer than from a bank.
Finally, if a dealership works with several different banks, this is a way for you get to multiple quotes quickly.
Dealership auto financing cons
Dealerships usually charge a commission or extra fee to set up your auto financing. This adds to the cost of your loan and usually makes the cost of dealership financing more expensive. Also, dealers work with the banks that they have relationships with which means these aren’t necessarily the banks that have the best deal for your auto loan.