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Is in-house car financing a good idea?

Find out more about the pros and cons of in-house car financing and learn when it’s best to avoid getting a car loan through a dealership.

So you want to get a car loan directly from your dealership to save time and energy? That might seem like a good idea if you’re in a pinch, but it’s not always the best choice. 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 funnelled 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.

When is in-house car financing a good idea?

In-house financing may be a decent option if you want a quick loan or you’d prefer a one-stop shop to buy and pay for your vehicle. It could also make sense if you have bad credit or are having difficulty qualifying for a loan outside of the dealership. Dealerships may also be a good fit if you want a brand new vehicle. This is because they’re more likely to lend you a higher amount than other lenders since you’re purchasing a car from their lot.

That said, it will typically cost much more to get in-house financing at a dealership than it will to get a car loan with an online lender, credit union or major bank. This is because your interest rates and fees will be much higher. You may also struggle with being locked into your loan, which means you won’t be able to prepay your outstanding balance to cut down on the interest you pay over time.

How can I get the best 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.

Benefits of in-house car financing

There are a couple of benefits to in-house car financing that might make taking this route a worthwhile option for some borrowers:

  • 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.

What to watch out for with in-house car financing

You should also keep your eyes open for the following drawbacks if you’re thinking about getting in-house financing:

  • 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.

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 loans. For this reason, it’s really important that you only sign up for one 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 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 loan options

Name Product Min. Loan Amount Interest Rate Loan Term Min. Credit Score Requirements
Car Loans Canada
$7,500
3.99% to 29.95%
12-84 months
300
Min. income of $2,000 /month, 3+ months employed
Search thousands of vehicles online, including $0 down options, from dealers across the country and get matched with affordable financing options. Auto loans are also available to those with bad credit, consumer proposals and bankruptcies to help rebuild credit.
CarsFast Car Loans
$500
4.90% to 29.90%
12-96 months
300
Min. income of $1,800 /month, 3+ months employed
Browse thousands of vehicles from dealers across Canada and get matched with financing that meets your needs. Apply online to purchase a new or used vehicle and get the vehicle delivered to your door.
Loans Canada Car Loans
$500
0% to 29.99%
3-96 months
300
Min. income of $1,800 /month, 3+ months employed
Get access to financing from multiple lenders across Canada through a single application with Loans Canada. Bad credit, CERB and EI borrowers are considered.
Coast Capital Car Loan
$10,000
Varies
18-84 months
650
Able to service debt payment of $300/month
Finance or lease both new and used vehicles with competitive rates and flexible terms from one of Canada's largest credit unions.
Canadian Auto News
$7,500
4.49% to 29.90%
12-84 months
300
Min. income of $2,000 /month, 3+ months employed
Answer a few simple questions to get matched with affordable financing options. Auto loans are also available to those with bad credit, consumer proposals and bankruptcies to help rebuild credit.
Canada Auto Finance
$500
4.90%-29.95%
3-96 months
300
Min. income of $1,500 /month, 3+ months employed
Canada Auto Finance is a broker that connects borrowers with partnered local lenders. Financing for a new or used car is available for borrowers with bad credit, no credit, CERB, EI or bankruptcy.
Carloans411 Car Loans
$500
1.90% to 19.99%
Up to 72 months
300
Min. income of $1,600 /month, 3+ months employed
Get connected with suitable lenders through CarLoans411. Finance your next car, van or truck with loans available in amounts from $500 to $50,000. Check eligibility for this loan through LoanConnect.
LoanConnect Car Loans
$500
9.90% to 46.96%
3-120 months
550
No min. income requirement
Get access to 25+ lenders through LoanConnect's brokerage. Receive pre-approval in as fast as 60 seconds and get your funds in as little as 24 hours.
Fairstone Secured Personal Loan
$5,000
19.99% to 23.99%
36-120 months
560
Established credit history and own your home
Fairstone offers secured personal loans up to $35,000.
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Compare up to 4 providers

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.

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