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How does in-house car financing work?

Learn about the pros and cons of in-house financing and when you should consider avoiding a dealership car loan.

So you want to get a car loan directly from your dealership to save time and energy? While in-house car financing can be a much faster and more convenient way to borrow money than taking out a traditional loan, it’s also much more expensive.

This is why you should consider other alternatives before you sign up for a car loan at the same time that you pick out your vehicle. Find out how you might benefit from in-house car financing with a dealership, and learn why you may want to avoid going this route.

How does in-house car financing work?

In-house car financing is much like any other form of loan. You get a lump sum of money to purchase a vehicle and then you have to pay that back over a specific period of time (called a “term”). The only difference is that the financing you get will be funneled through your dealership rather than another lender.

Dealerships that offer in-house financing usually work with a private lender to get a loan on your behalf. Some of them will also provide financing to you directly so that they can collect the money you pay in interest and fees.

Is in-house car financing a good idea?

In-house financing may be a decent option for the following reasons:

Pros of in-house car financing

  • Fast and convenient. There’s nothing easier or quicker than applying for in-house car financing and driving off the lot with your new vehicle on the same day.
  • Decent last resort option. In-house financing can be used as a last resort if you have bad credit and can’t qualify for financing with a traditional lender.
  • Easy to qualify. You’ll usually be able to qualify with a low credit score and fewer eligibility criteria than some other lenders.
  • Lets you purchase a vehicle. You’ll be able to afford a vehicle that might be out of your price range otherwise.

    Cons of in-house financing

    That said, there are some important cons to consider before going with in-house financing, including:

    • High interest rates. You’ll usually pay much higher interest rates for in-house car financing with a dealership than you will with a traditional lender.
    • Large down payment. You may have to pay a larger down payment before the dealership will let you drive away with the vehicle of your choice.
    • Strict contract. Your repayment contract could be much more rigid with a dealership, which may end up causing you trouble if you miss any of your payments.
    • Closed financing. You often won’t be able to prepay on a dealership loan, which means you won’t have the option to pay your loan off early.
    • Not ideal for improving credit. Many dealerships won’t report your payments to the credit bureau, so your credit score won’t go up as a result of paying off your loan.

    How can I get the best in-house financing interest rates?

    One of the major downfalls of in-house car financing is that the interest rates you pay will be much higher than with a traditional lender. That said, your best bet to get decent rates from a dealership is to negotiate with them around what you can afford. If it looks like you’re walking away from the deal, they have a larger incentive to get you back to the table.

    It will be difficult for you to get ideal rates if you have less-than-perfect credit. In this case, you should ask for prepayment options so that even if your interest rates are high, you have the option to pay your loan off early if you can afford to. You should also be sure to shop around between dealerships to see which one gives you the best offer.

    Your last step is to ask your lender if their interest rates are precomputed or simple. Precomputed rates are precalculated for every year of your loan. This means you’ll pay seven years of interest on a seven-year loan, even if you pay your loan off early. Simple interest rates are a better choice because they only apply to your outstanding balance.

    Things to consider before you sign up for in-house car financing

    While in-house car financing is a convenient option, it should be avoided wherever possible. This is because dealership loans often come with much higher interest rates and less flexible terms than traditional car loans. For this reason, it’s really important that you only sign up for it if you’re 100% certain that you can afford to make your payments on time.

    If you don’t make your payments on time, you risk badly damaging your credit score and potentially even losing your vehicle in the end. This is why you need to read your loan contract carefully and make sure you’re ready to take on the extra expense of in-house financing before you sign on the dotted line.

    In-house car financing alternatives

    There are a number of options you might want to consider instead of applying for in-house financing:

    • Personal loans. Your best bet to get better interest rates for your car loan would be to go through an online personal loan lender, credit union or big bank. These institutions have to compete with each other to give you the best rates, so they may be more willing to skew your loan terms in your favour.
    • Secured loans. If you have any valuable assets to secure your loan against, you may want to use them to get a better rate. For example, if you own your own home, you could use it to secure a car loan with more favourable terms. This will be the case even if your credit score isn’t very good or you have very little credit history.
    • Bad credit loans. Bad credit car loans are another alternative that tend to beat out in-house car financing. With these loans, your rates will be higher than average but all of your on-time payments will be reported to the credit bureau. This means that your credit score will go up as you pay off your loan.
    • Guarantor loans. To get a better chance at qualifying for a personal loan, you can also ask a co-signer or guarantor to let you benefit from their high credit score. In return, they absorb some of the risk that your lender takes by agreeing to pay back your loan if you’re unable to fulfill your obligations.

    Compare car loans you can apply for now

    1 - 4 of 4
    Name Product APR Loan Amount Loan Term Requirements Long Table Description
    CarsFast Car Loans
    4.90% - 29.90%
    $500 - $75,000
    12 - 96 months
    Requirements: Min. income of $2,000 /month, 3+ months employed
    Loans Canada Car Loans
    0% - 31.99%
    $500 - $35,000
    24 - 120 months
    Requirements: Min. income of $1,800 /month, 3+ months employed
    0% financing applies to some new models with loan terms up to 60 months. Offer ends May 31, 2023.
    Canada Auto Finance
    4.90% - 29.95%
    $500 - $45,000
    3 - 96 months
    Requirements: Min. income of $1,500 /month, 3+ months employed
    Clutch Car Loans
    From 8.49%
    $7,500 - No max.
    12 - 96 months
    Requirements: 3+ months employed, Max.1 bankruptcy, Ontario & Nova Scotia only

    Bottom line

    In-house car financing can be beneficial if you’re looking for a fast and convenient way to get financing. It can also be a decent last resort option for borrowers with bad credit. That said, you can expect to pay much higher interest rates with a dealership than you would with a traditional lender. You may also end up with a stricter contract that locks you into your loan and leaves you paying more in the long run.

    Read our full guide to car loans here to learn more about your options.

    Frequently asked questions about in-house financing

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