Financing a car? Learn the pros and cons of getting a loan from a financial institution or through a dealer.

You’ve decided to buy a car, but before you hit the road, you’ll need to figure out the best way to finance it.

What are your options? You can get a vehicle loan from a financial institution, or you can finance the car through the dealer. Each option has pros and cons, and you’ll want all the facts before you hop behind the wheel.

Go Loan Shopping

As with any big financial decision, it’s a smart move to shop around for a car loan. You can start by talking to a financial institution. Even if you don’t have the exact car picked out, you can usually apply for an auto loan. You can use an auto loan from a financial institution to purchase a vehicle at most franchise dealerships along with some independent dealers. The loan can also be used to buy a car from a private seller.

Your financial institution’s loan specialist will walk you through the application and loan process and let you know what to expect when you go to the car dealership. They’ll also let you know about any promotional rates they are offering on auto loans, which can help you save money. Once you apply, approval can be quick, especially if your credit history is in good shape.

It can be a good idea to investigate auto loans from online lenders, too. This could be a little trickier, as you might not be able to provide all the necessary loan application details until you’ve picked out the car you want. Keep in mind that while applying with an online lender can be convenient, they may have different rules and restrictions than other financial institutions and interest rates can be higher.

Once you’ve picked out the car you want and have a loan offer from a financial institution, you can look at financing options through the dealership. They will have their own loan application, which they will send to multiple lenders. Each lender will review your application, pull your credit report (just as your financial institution did), and then send the dealer their financing offers.

Shopping around for an auto loan can give you some room to negotiate. Depending on the offers you get, you can see if your financial institution can improve its terms or if the dealer can reduce the price of the car.

Getting a Loan Through a Financial Institution

Let’s explore the pros and cons of going through a financial institution for your auto loan.

Pros

• You have an established relationship. If you get financing through your own financial institution, that relationship may help you get approved or get a better rate.
• You are borrowing directly with no intermediary. Dealers need to make money on financing, so if you borrow directly from a financial institution, you won’t pay any extra fees.
• You get convenient ways to apply. Many financial institutions offer mobile apps and convenient online services. You can also apply for a loan in person at one of the local branches.

    Cons

• You have less wiggle room on your interest rate. Even though you might have a relationship with a financial institution, they probably won’t negotiate a lower annual percentage rate (APR), which is basically your interest rate.
• You lose out on one-stop shopping. Getting a loan from a financial institution adds an extra step to the process. Some people like the convenience of handling the entire transaction at the car dealership.

Getting a Loan Through the Dealership

Now let’s look at the benefits and drawbacks of getting a loan through the dealer.

Pros

• You may be offered promotional pricing or low rates. Because they’re motivated to get you to buy, a dealer may offer you a special rate – like 0% APR – on certain new car models if you have excellent credit. This could end up being a better deal than financing through a financial institution.
• You have room to negotiate. The dealer is the financing intermediary, so they usually charge higher rates to make money on a loan. Still, they want to make a sale, and they are generally willing to negotiate.
• You get the advantage of one-stop shopping. Financing through a dealership is convenient. You can get your car and your car loan all in the same place, usually on the same day.

Cons

• You don’t have an established relationship. Your dealer may offer you financing through a financial institution that you’ve never worked with. In that case, you won’t get the benefits of an established relationship, such as getting a lower rate for being a customer.
• You may end up paying higher rates. So that the dealer can make money from the loan, they will likely offer higher rates than a financial institution. The dealer may be happy to set up a longer-term loan, but the longer you pay, the more money you pay.

Weighing Options

If you’re already a customer of a financial institution, it can help the process of getting approved. Plus, you’ll likely be able to take advantage of a better rate. Your financial institution could also provide a convenient way to manage your auto loan with your other accounts. If you’re leaning toward going with your financial institution, it’s still worth finding out what your car dealer can offer, as it can help you negotiate the best price and loan terms.

Remember, it’s possible to get a good deal financing your car through the dealer, so be sure to explore all your options. One word of caution: Some car dealers advertise in-house auto loans for people with bad or no credit. These can be enticing – especially for someone with a bumpy credit history – but they generally have outrageously high interest rates and should be avoided. There are likely better options out there.

The Bottom Line

Before you decide about auto financing, review each loan offer and be sure you understand all the terms and conditions. You’ll also want to confirm that the payment fits your budget.

In addition, figure out the total amount you’ll pay for the vehicle over the life of the loan and consider any trade-offs. If lower payments are a priority, a longer-term loan might be a good fit, even though you’ll end up paying more overall for the car. If getting the best price is important to you, incentives like a cash rebate or a low interest loan may help you decide.

Once you’ve considered all the possibilities, you can make a well-informed decision, and get behind the wheel of your new vehicle with confidence, knowing you made the deal that’s right for you.

If you have questions or want more information about financing a new vehicle, reach out to your financial institution.