Getting a Car Loan: Dealer VS Bank Financing
Buying a new car can be costly–even the largest fridge or the flattest TV screen there is can’t come close to the amount of thought (and money) that goes into this decision. After singling out your dream car–that one model that stood above the rest (and put sparkles in your eyes)–the real challenge begins, paying for it.
Unless you’ve saved enough cash for the total amount, you’re probably purchasing your new set of wheels by getting a car loan. But with all the options out there, which one is the best for you?
To make things simple, car financing basically boils down to two options: Dealer Financing or Bank Financing. If you want to get the best deal, it’s important to know what you’re getting into first.
After all, the longer-term payment period of the loan could either spell thousands of miles of automotive bliss or agonizing years of driving knowing you’re stuck in the wrong deal. Here’s a simple breakdown of the two:
In bank financing—with no middleman (dealer) involved that requires additional commission—rates are likely to be lower. Having a healthy credit score and utilizing the bank’s other products such as their credit card or other accounts can get you discounts on interest rates, as well. As part of their personalized service, banks will even tell you if you’re about to pay too much for the car that you’re planning to buy or other things that seem off from a financial perspective.
You can estimate how much you can borrow with our Auto Loan Calculator:
The cost? Although they vary from bank to bank, eligibility requirements are generally stricter than with dealers, which means more criteria are to be met before getting approved for a loan. Unlike dealers that offer negotiable interest rates, a bank’s offer is final.
- Competitive rates
- Personalized service
- Solid payment terms with interest spread evenly throughout the loan term
- Rates are often non-negotiable
- Stricter Requirements
Tip: Go to your bank first and see the loan offer they’re willing to provide before visiting your dealer to compare. If the dealer can match the bank’s rate, then great (it’s rare, but not impossible). Otherwise, you’re really just better off applying for an auto loan with the bank. In the meantime, read how you can improve your credit score here.
The thought of “finance, purchase, and drive it home the same day” make dealer financing a one-stop-shop for buying your new car. In dealership financing, dealers send your credit information to different lenders; once approved, a quotation is sent back for you to choose from and often negotiate even further. With this much flexibility in payment terms, you’d think it’s the obvious choice.
Well, not so fast.
Keep in mind that as a business, dealers have to make money out of the deal, too. Therefore, interest rates can end up being higher in the long run. Also, being late on payments translate to higher penalties, and while some dealers will go as far as stretching a loan period beyond the usual five years to lower monthly payments even further, in reality, you’re probably going to end up paying significantly more than the vehicle’s actual price.
- Easy, convenient, one-stop-shop
- Working with different finance companies mean more offers for you to choose from
- Some rates can be competitive
- Typically lower rates are rare and they’re usually not competitive
- Higher interest mark-up
- Hard-sell through “discounts” and “promos” only to make back the amount lost through interest