There are a number of options when it comes to financing a new car. Two of the most popular methods are dealer financing and new car loans. It’s important to know the difference between these financing options in order to know which one is right for you.
The main difference between a car loan vs dealer financing
The main difference between a car loan vs financing from a dealer is in how you apply. If you borrow through your dealer, they’ll typically send your details to multiple lenders to see which ones will approve your loan. With a car loan, you apply directly with one lender and can even get a quote on your rate before you submit your application.
Because dealerships have a relationship with these lenders, they might have room to negotiate. However, you won’t be able to compare lenders yourself and could potentially find a better deal if you took control and applied for a car loan yourself.
Car loan vs dealership financing: a breakdown
Dealership financing
Auto loan
Interest rates
Can offer lower interest rates than car loans
Low interest rates may only be available for promoted makes and models
Commission for the car salesman may push rates up
0% rate deals may indicate a higher purchase price for the car
Lenders offer various rates, which means you can choose the most competitive
Using your car as collateral lets you take advantage of lower rates
Loan term
Typically 3- to 7-year terms
A down payment is generally required
Early repayment costs may apply
Choose terms between 1 and 7 years
Early repayment costs differ between lenders
Benefits
The dealer finance representative handles the paperwork
No need to shop around for better offers
Gives you leverage to negotiate the sale price, interest rate and loan term
A range of competitive car loans are available
Your car loan is repaid in full at the end of the term
You can choose your lender and loan type
Loans are available for new, used and classic cars
Drawbacks
It’s usually only available for newer vehicles
Down payments can be a large upfront cost
Higher interest rates may apply to certain types of loans
Upfront and ongoing fees may apply
Who it’s best for
Borrowers who want to buy a new car and have a down payment
Borrowers who want to shop around and have the option of buying from either a dealer or a private seller
Compare car loans
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Dealer finance vs online lenders
If you’re crunched for time but want to compare your options, an online lender might be the way to go. You can typically pre-qualify with an online lender in a few minutes, which will give you a ballpark idea of your rates, and once officially approved, you can often get your money as soon as the next day.
Some online lenders might already have a partnership with your dealer. In that case, the dealer might get the funds for you directly and you can sometimes even drive away in your car as soon as you sign your papers. Applying through a dealership is generally faster and involves less work on your part.
Online lenders are especially useful if you have less-than-perfect credit. Online car loan providers can offer faster funding for people with damaged credit or who are new to auto financing. This option is often the most flexible and easy to use, providing you with a selection of lenders who have already pre-approved you after filling out a quick online application. Some can also help you find a car at a dealership.
Dealerships
Online lenders
Interest rates
May offer lower interest rates than car loans from online lenders
Low interest rates might only be available for promoted makes and models
0% rate deals may indicate a higher purchase price for the car
Commission for the car salesman could push rates up
Can offer interest rates that are as low as 3.99% up to 46.96%, depending on your credit score
Expect high interest rates for bad credit
Loan term
Loan term range, which is around 3 to 7 years, is generally narrower compared to loan term ranges of online lenders
A down payment is generally required
Early repayment costs may apply
Choose terms of between 3 months and 10 years, depending on how much you’re borrowing
Higher interest rates may apply to certain types of loans, especially bad credit loans
Upfront and ongoing fees may apply, including origination fees, prepayment fees and late penalties
Short pre-approval window of about 30 days
Who it’s best for
Borrowers who want to buy a new car and have a down payment
Borrowers who need to get approved for a car loan quickly, who have fair or bad credit or who prefer to do their loan shopping from the comfort of home
Banks vs dealer financing
A lot of dealer financing ultimately comes from banks, so there might not be as much of a difference between the two as you think. However, one plus for banks is that they do not have the markup rate that dealerships do. Because dealerships usually work with outside lending institutions to provide buyers with loans, dealers usually mark up the interest rate of these loans to make a profit. If you work directly with a bank, though, you eliminate the middleman and might save yourself some money.
You can even apply for a personal loan from your bank to purchase a new car. This is a relatively hands-off experience, and only applicants with good credit typically qualify. This route is often nicknamed “direct lending”. If your credit score is in tip-top shape and you’re in good standing with the bank, you can score a competitively low interest rate, especially if you’re willing to secure your loan with your car.
On the downside, banks are typically less negotiable than dealerships when it comes to discussing interest rates or loan terms. It might be harder to get a loan approved directly from a bank if you don’t meet certain criteria (such as having a good to excellent credit score or a lower income)
Dealerships
Banks
Interest rates
Similar to banks, they can offer lower rates, but low interest rates may only be available for promoted makes and models
Commission for the car salesman may push rates up
0% rate deals may indicate a higher purchase price for the car
Can offer lower interest rates, similar to dealership financing
Will factor in your credit score heavily in determining your eligibility for a loan
Loan term
Loan term range (typically 3- to 7-year terms) is somewhat narrower than banks’ ranges
A down payment is generally required
Early repayment costs may apply
Choose rates between 1 and 7 years
Early repayment costs differ between banks
Benefits
The dealer finance representative handles the paperwork
No need to shop around for better offers
Gives you leverage to negotiate the sale price, interest rate and loan term
You can use the funds to buy any car you want and aren’t tied to a specific dealer
You can buy a new or used car, and even shop from private sellers
Funds can be used for additional expenses like insurance
Having a specific approved loan amount on paper could keep car salespeople from upselling you
Drawbacks
It’s usually only available for newer vehicles
Down payments can be a large upfront cost
Difficulty with getting approved if you don’t have a good credit score
Rates are sometimes higher than car loans
Difficult to meet eligibility requirements
Who it’s best for
Borrowers who want to buy a new car and have a down payment
Borrowers with a great credit score who prefer to take the direct lending route to open up their car-buying options
How do I choose the right option for me?
When you’re deciding on the best option to help you buy the car of your dreams, there’s truly no one-size-fits-all answer. The best option for financing your car is an individual choice, based on your financial situation and what you’re looking for in a car loan.
Here are some factors to keep in mind:
Your creditworthiness. In some cases, your hands are tied: If you have bad credit, banks are off the table, so you can narrow your options down to dealership financing and online lenders. As we mentioned above, it’s commonplace for online lenders to provide “bad credit” auto loans to people with bad credit or no credit history at all, while some car dealerships specialize in in-house financing to borrowers with bad credit. Their goal is to help push inventory off of their lots. If you have great credit and are in good standing with your bank, it’s worth applying for a personal loan to buy your car, especially if you can score a low interest rate.
Your time constraints on securing financing. If you’re in a rush and you need to get approved quickly, online lenders may be faster to pre-qualify you and deliver on your approved loan compared to traditional lenders like banks and credit unions. If you’re looking for a one-stop shop, you can walk into a dealership, test drive cars until you find the right fit and then figure out financing through your dealer.
What you need financing for. If you know precisely which car you want and where you want to buy it from, it may be worth making a beeline to the dealership to ask about financing options. On the other hand, if you prefer to shop around, a bank or online lender can qualify you for a loan amount and you can do your car shopping at various dealerships knowing you have the funds to make your purchase. You may even need the funds to pay for insurance, parking and other car-related expenses. If you know you need funds to cover these costs, this may steer you in the direction of a bank or online lender-provided loan. If you’re buying from an auction or private seller, you can narrow your scope to these loan options too.
Think carefully about your financial circumstances, how much time you have to shop around, and which lenders may be most willing to work with you for financing. And always remember to compare loan deals so you know you’re getting the best interest rate and loan terms.
Julian and Clay have both purchased new cars for $20,000 each. Julian opts for a car loan while Clay takes on a financing option from the dealership. Who chose the better financing option?
Car loan
Julian earns $60,000 per year and has minimal consumer debt. His credit score is fairly good, and as a result, the bank is only too happy to give him a loan to buy a car. Julian's car loan comes with a 5.5% interest rate for a 5-year period and he pays $432 in monthly repayments. At the end of the loan, he will have paid a total of $3,302 in interest fees, bringing his total amount to $23,302 when all is said and done.
Dealer financing
Clay only earns $35,000 per year and has been carrying a balance of several thousand dollars on his credit card for a few years now. He gets turned down for an auto loan from the bank, so he begins hunting around for a dealership that will finance his car. He finds 2 rival sellers who are both willing to procure a loan for him.
Using the first one's offer, he successfully negotiates a better deal with the second seller. Happy to keep Clay from giving his business to a rival dealership, the seller offers him a 72-month loan with no down payment and a 4.5% interest rate. Clay accepts and drives away with his new car. In the end, he only pays $359 per month in repayments and a grand total of $3,231 of interest over the whole term of the loan, bringing his overall amount to $23, 231.
In the end, Clay will pay $71 less than Julian without having to make any bulk payment upfront and with a cheaper monthly repayment. Not bad for a guy with a much smaller salary and a higher debt load. It's true that Clay is stuck paying his loan off for a longer time than Julian, but it's also true that Julian would be unlikely to convince the bank to give him the interest rate that Clay is getting.
Of course, this scenario could have gone very differently. Had there been no rival dealership to contend with, the dealer who gave Clay a loan might not have sweetened the deal as much as he did. Given Clay's below-average financial situation, he could've easily been charged a significantly higher interest rate and ended up paying more than Julian.
* This is a fictional, but realistic, example.
Other ways to buy a car
If neither dealership financing nor a car loan catches your interest, you have a handful of other options worth considering too. They include the following:
Buying the car with cash. If you have the money upfront, you don’t need to finance your vehicle at all.
Crowdfunding. You might be able to raise the funds from your friends and family, especially if you have a compelling story to tell about why you need the car.
Home equity loans. Borrowing against the amount you own in your home could be a cheaper way to fund a car loan, though you risk losing your home if you default.
New credit cards. If you’ve got a new card with a 0% promotional period, you might be able to put some or all of your car loan on plastic. Try to pay as much off as possible before that period is over to avoid those high credit card APRs.
Bottom line
Convenience always comes with a price and that extends to car loans. Getting an auto loan from a bank might be easy because the people there know you personally and there is no middleman markup. However, you might be able to negotiate a better rate with a dealership if you have enough bargaining power on your side. On the other hand, getting approved for auto financing quickly and easily without having to stir from the comfort of your own home might be the ultimate selling point for you, and you might want to go with an online lender.
Before settling for what a dealer is offering, compare outside banks, online lenders and credit unions. You might be surprised at the deals you can get when you eliminate dealers’ interest rate markups. In many cases, you might land a better deal than what a dealership would give you.
No matter what route you choose when car shopping, always do your research so that you understand how to get the most out of your car loan options.
Frequently asked questions
Some dealers can approve you in a day. However, others may take 1-2 days; some can even take up to a week.
Yes. If you’re a member of a credit union, you’ll likely find highly competitive rates for auto loans.
Typically, loan approval lasts for 60 days. If you don’t move forward with the loan within this time frame, you’ll have to reapply.
Financing a car simply means you’re taking out an auto loan to help you make your car purchase. Most people don’t have the cash to pay for a car upfront, so they’ll take out a car loan, or auto financing, to buy their car. Then they pay back their lender, including any interest and fees for borrowing the money.
There isn’t a difference. When you’re financing your car, you’ve taken out a car loan to buy your vehicle, which you’re then making repayments on. There is a difference between dealership financing and auto loans. If you borrow through your dealer, they’ll typically send your details to multiple lenders to see which ones will approve your loan. With a car loan, you apply directly with one lender and can even get a quote on your rate before you submit your application.
Yes. If you tell friends or family you’re financing your car, for example, it simply means you’re taking out an auto loan to help you make your car purchase. Most people don’t have the cash to pay for a car upfront, so they’ll take out a car loan, or auto financing, to buy their car. Then they pay back their lender, including any interest and fees for borrowing the money.
Carmen Chai is a freelance writer at Finder, specializing in financial products. She is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. She has reported on personal finance, mortgages, and banking products for nearly a decade.
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