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Should I Finance My Car Loan with a Dealership or My Bank?

By: Jillianne West, Consumer Lending Operations Manager

Posted on 6/25/2021 12:00:00 PM

Happy couple at a car dealership reviewing finance options

It happens pretty often. You're at the dealership and have picked out the perfect car when the dealer asks how you plan on financing it. At this point, many buyers simply go with what seems like the quickest and easiest option and choose to finance through the dealer. After all, you've found a car you love, and you want it now, what's the point in waiting. But stop and think, is this the best option or just a fast one?

When it comes to financing a car, you generally have two options: financing through the dealership or a financial institution like your bank. Alternatively, you could pay cash, but this is not a feasible option for most people. However, finding the right financing for you, depends on a few different factors. There is a better choice. 

Financing Through the Dealership

When a dealer arranges financing, they contact their preferred financier and get the loan set up for you. The process for this is simple – you tell the dealer how much you can afford monthly, and they figure everything else out. They'll also pull out all the stops for you since it's in their best interest to sell the car right away. In most people's minds, the dealer is doing all the work, and you reap all the benefits. It sounds like an ideal situation, right?

Well, what the dealer might not tell you is that they may negotiate a higher interest with you than what the financier is offering. In this case, the difference is their compensation for handling the financing on your behalf.

Another form of dealer financing is the "buy-here, pay-here" type of financing, where the loan comes directly from the dealership. These types of loans are typically geared towards individuals with poor credit. Unfortunately, this type of financing requires larger down payments and incurs higher interest costs and fees in the long run. This typically means the buyer is at a much higher risk of repossession.

If you choose to go for dealer financing, it’s important to note that you're completely excluded from the negotiation process. Which means, in this situation, the dealer holds all the cards, and you’re left with no choice but to trust they have your best interest in mind. This is why you should remember; pressure and emotion should never be part of the purchasing process.

Happy couple fills out car financing paperwork with their banker

Bank or Credit Union Financing

Getting an auto loan from a bank or credit union allows you to buy a car with the equivalent of using cash, enabling you to have the negotiating power you need to get the best deal. In addition, you get to shop around for a loan and choose the one that works best for you. Typically, these loans have fixed interest rates and a predetermined loan term. 

These factors are based on your credit score, debt-to-income ratio, and even the type of car you intend on buying. While it may be harder to qualify for a bank loan, it's almost always the better option. For one, you can get preapproved before you even step foot in the dealership. Then, all you have to do is negotiate the price you are willing to pay at the dealership. You will also know all the terms of your loan in advance, which can help you avoid buying a more expensive car than you can afford.

Don't worry if your credit score and history are less than perfect, you can still qualify for a bank loan – you may just have to pay a higher interest rate which will more than likely still be better than what you'll get via dealership financing.

The best part about bank loans is that there are no interest markups meaning you'll get the best deal possible. It can be tempting to take the dealer financing option as they offer longer repayment periods. But remember, the longer the loan, the more interest you will be paying in the end.

So, Which Is the Best Option?

Getting a car loan via a bank or credit union is by far the best option for almost everyone. Not only do you get better interest rates which translates to lower payments and cost overall, but you also have negotiating power on your side so you can get a better price on the car.

Whichever you decide, always choose the option that will save you the most money. Remember, you should always research your options thoroughly before making any big purchase. And never let anyone pressure you into making a snap decision.

If you're in the market for a new or pre-owned vehicle, give us a call on 904.354.8537, and we will walk you through everything you need to know. We can even help you get preapproved so you have complete control when you find the car of your dreams.