Is It Better to Finance a Car Through a Bank or Dealership?

Knowing what you need to buy a car is the first step in the car-buying process. Below are the pros and cons of financing with a bank versus a dealership: 

Making the best decision for who services your car loan requires exploring all the possibilities. Read on to learn more about financing your auto loan through a bank and a dealership.   

Besides dealerships, banks and credit unions also offer auto loan financing. Some banks may be online-only, while others occupy a traditional brick-and-mortar building. Like auto loans processed through a dealership, car loans from a bank require a hard credit check to verify your financial details. Remember this as you compare shop for the best auto loan terms. 

Pros of financing through a bank 

Working with a bank to obtain an auto loan can help demonstrate to dealerships that you’re an invested and informed buyer. Below are additional advantages of financing your car loan with a bank: 

• Preapproval terms help outline what you can qualify for, from the total loan amount and interest rate to additional loan terms
• Can help simplify negotiations 
• Potential discounts available 
• Helps to identify credit problems ahead of time 
• Compare loan offers without the pressure associated with a dealership 
• Potential for more favorable loan terms
• Customer loyalty and service may be superior
• Work directly with a lender 
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If you’re concerned about your credit, you can request a free credit report every 12 months. Review your report to ensure the information within is accurate and updated. Dispute and resolve any discrepancies before you attempt to obtain a car loan. 

Cons of financing through a bank 

Approaching several banks to see what offers you qualify for can take a while. Here are some additional drawbacks of financing an auto loan through a bank: 

• Requires a larger time commitment
• Bank may limit how you can use funds (no private party purchases, for example)
• Subject to restrictive eligibility requirements 
• Processing times vary 
• A lower interest rate isn’t a guaranteed 
• Loan approval can depend on the car you choose 
• Requires more effort in comparison shopping

Carefully weigh these pros and cons before you sign on the dotted line. While a particular option may make financial sense, your comfort level and goals should also factor into your decision. You can also consult friends and family to gain knowledge from their experiences. 

Part of financing a car loan through a bank is figuring out for how long you can get a car loan. Below are the additional steps required to finance your next car purchase through a bank: 

1. Research if your bank offers auto loans: Most major banks offer this type of loan. Note that auto and personal loans vary, and some banks don’t allow you to use a personal loan to purchase a car. 
2. Gain preapproval: Submitting a preapproval application can help you roughly determine what auto loan terms you qualify for. Preapprovals don’t guarantee the terms offered and require a hard credit check to solidify. 
3. Comparison shop: You can then shop around the terms you received from your bank to see if other banks will match or beat their offer. You may even visit a dealership to see if they’ll compete for your business. 
4. Select your lender: If you’ve determined your bank offers the best car loan terms, submit a complete application to set your agreement in stone. Carefully review any agreements before you sign any paperwork.

Once you’ve received the funds from your auto loan, you can approach dealerships as you would if you were a cash buyer. When paying for the car, you simply write the dealership a check or otherwise arrange payment. You then repay the auto loan like you would if you obtained it through the dealership. 

One of the first things you might ask when considering a dealership for your next auto loan is whether car dealerships are open on Sundays. The good news is that some of them are, depending on where you’re located and who you bank with. In addition, most dealerships offer two types of financing: dealer-arranged and captive (in-house): 

• Dealer-arranged: When dealerships arrange financing, they work with a network of third-party lenders to get you the best deal. After assisting you in filling out an application, the dealership sends your details to its lender network. Those lenders return a “buy rate,” which signifies the interest rate they’re willing to offer. Most dealerships pad that interest rate by 2% to 4% to increase their profits or may receive a commission if that’s not the case. The third-party lenders underwrite and service your loan if you approve it. 
• Captive: The financial arm of a dealership represents a captive lender who can offer customers with superior credit scores and qualifications better loan terms. Buy here, pay here dealers also provide car loans to customers with lower credit scores. However, these latter auto loans often suffer from higher interest rates that offset the risk borrowers pose. Eligibility requirements vary between lenders.

You will likely be presented with dealer-arranged financing unless you have stellar credit. However, many small dealerships offer captive financing, including buy here, pay here dealerships. The main differences between the two can be narrowed down to where the loan originates and what qualifications requirements apply. 

Pros of financing through a dealership

Dealership financing doesn’t have to be a struggle. Here are some of the advantages of financing your car loan through a dealership: 

• Streamlined application process
• Convenience of finding a lender and comparing offers
• Access to lenders unavailable to you as an individual 
• Lower qualifications for borrowers with fair or poor credit 
• Potential for discounts, rebates, incentives, special financing offers 
• Terms may be negotiable

Most first-time car buyers submit to obtaining financing through a dealership. That experience can help inform your next car purchase and give you the confidence to explore your options. Whether or not dealership financing works with your financial plans is ultimately up to you. 

Cons of financing through a dealership

Financing through a dealership comes with some disadvantages as well: 

• Higher interest rates and less favorable terms 
• Lender options may be limited
• Qualification requirements vary 
• Risk of hidden markups
• Higher credit thresholds for more favorable terms
• Potential for higher down payment requirements, especially if you have a lower credit score 
• The presented interest rate could include dealership commission and may not be the best rate you can qualify for 
• You must buy a car from within the dealership network you’re working with

Before looking for vehicles, determine if you’d rather explore bank or dealership financing. It’s much easier to look for a car you know you can afford than to stretch your budget to afford a car that’s out of reach. The effort you put in could result in actual savings you can literally take to the bank. 

The basic steps involved in financing a car loan through a dealership include: 

1. Determine which car you want to buy: If you plan on financing your loan through a dealership, you’ll need to find the vehicle you want to buy first. You can compare inventory online or by visiting the dealership in person.
2. Negotiate the price: Negotiations may include several steps, from haggling the purchase price to discussing trade-in values and down payments. 
3. Submit a car loan application: When you’ve agreed upon basic terms, you must submit an application and let the dealership perform a hard credit check. They’ll also send your information to their lender network if you don’t qualify for in-house financing. 
4. Review offers, terms, and conditions: With real-world financial data now at play, dealers will fill out the contract terms and review them with you. 
5. Sign the contract: If you’re satisfied with the loan agreement, all that’s left is to start initialing pages.

Once you’ve agreed upon the car loan terms, your contract applies until you’ve paid off the loan in full. You’ll then receive the title to your car and have the freedom to do with your car what you will. 

Purchasing a car requires several decisions, from figuring out if you can use a credit card for a down payment on a car to researching the diagnostic fee at a dealership in case your vehicle needs repairs. Determining whether you should finance with a dealership or bank requires careful thought. Ultimately, the decision to finance through a bank or dealership depends on what your comfort level is with comparison shopping, your budget, and the security of your financial situation.