Save money by knowing your options before you jump into dealership finance or a new car loan.
Dealership financing vs. auto loans
Dealerships financing generally come with extremely low interest rates by, usually if you make a down payment or by trade in your car.
Auto loans, on the other hand, are secured loans that use your car as collateral. Lenders give you a lump sum payment to purchase your car, and offer more competitive rates than you would with an unsecured loan. However, if you default on your loan you can lose your vehicle.
|Dealership finance||Auto loan|
|Who it’s best for||Borrowers that want to buy a new car and have a down payment.||Borrowers that want to shop around and have the option of buying from a dealer or a private seller.|
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Dealer financing & car loan side by side
Who saved more money?
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 — so who chose the better financing option?
Julian’s car loan comes with a 7% rate for a five-year period and pays $396 in monthly repayments. At the end of the loan he’ll pay a total of $3,761 in interest, amounting to $23,761 when all said and done.
Clay, who takes on dealer finance, will pay $283 each month for the term of his loan. But his $5,000 down payment means he’s only charged interest on $15,000, resulting in lower ongoing repayments.
When the loan is paid off, Clay will have paid a total of $21,980. That’s $1,781 less than Julian.
Convenience always comes with a price and that extends to the dealer-financed car loan. Before settling for what a dealer can offer, compare outside banks, online lenders and credit unions. In many cases, you’ll find terms that are better than the dealer’s.
No matter what route you choose when car shopping, always put in the time to research so you understand how to get the most out of your options for car loans.