Editor's choice: Carvana
- Most credit types welcome
- 45-day preapproval
- Seven-day guarantee
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|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.|
The main difference between dealership financing and auto loans is in how you apply. If you borrow through your dealer, they’ll typically send your details to multiple lenders to see where you qualify. With a car loan, you apply directly with one lender and can get a rate quote 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 and could potentially find a better deal if you apply for a car loan yourself. There are also differences depending on which type of lender you consider.
If you’re crunched for time but want to compare your options, an online lender might be the way to go. You can typically prequalify with a lender in a few minutes to get a ballpark idea of your rates and 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 directly and you can sometimes even drive away in your car as soon as you sign your papers. However, applying through a dealership is generally faster and involves less work on your part.
A lot of dealer financing also comes from banks, so there might not be as much of a difference between the two as you think. However, applying for a car loan from a bank is often not as easy online.
Prequalifying can be difficult, making it hard to compare rates between banks. And the whole process can take a lot longer, since banks often rely on older technology than online lenders. Plus, banks typically have tougher credit requirements than other lenders and you might not be eligible if you don’t have good or excellent credit.
It depends on your situation. If you’re looking for a more hands-off experience or need funding fast, dealership financing might be a better option. But if you’re not up for negotiating and aren’t locked in on a particular make or model, a lender could be the way to go.
Here’s why you might and might not want to finance through your dealership.
Here’s why you might and might not want to get financing from a bank, credit union or online lender.
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.
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