Ever wondered what the best way to finance a car? We explain it to you here!
There are two primary options when buying a car using a loan – through the dealership or a bank. Most people are, therefore, often confused about which option to choose. After all, the primary objective is getting a car that suits your needs and matches your style.
Today, we take a comprehensive look at one critical question – is it better to finance with a dealer or bank? Although there is no right or wrong way to finance your car, the method you choose will depend on your financial situation. Read on to ensure you save time and money when purchasing your dream car.
Bank Car Financing
With bank financing, you go to a credit union or bank and apply for a car loan. Therefore, your loan gets pre-approved before you go to the dealership. Your bank or credit union will give you a commitment letter and quote to present to the dealer. It is an easy way to get car financing since the contract finalizing process is much quicker.
Equally, getting a preapproved amount limits add-ons on your purchase. Therefore, the dealer will not spend most of their time trying to persuade you to get extras. You can get a car that perfectly fits within the limit.
Different banks and credit unions allow for online preapproval. You won’t need to physically visit their branch to get car financing. However, most of them will need more vehicle information to better process your application. It is, therefore, vital to reduce delays by first deciding which car you want.
Unlike working with a dealer, bank and credit union rate-offers don’t include any mark-up. However, the initial rate quote is never the final offer when purchasing a car. The lender has to perform a hard credit check. Doing this will help them adjust the car loan accordingly, depending on your full credit report.
Finally, your options will differ depending on whether you are getting a used car or a new one. A few credit unions and banks have a limitation on vehicle mileage and age. Therefore, new vehicles tend to qualify for low-interest rates compared to older ones.
Dealership Car Financing
Similar to a bank car financing, dealership financing allows you to get a car loan. However, the dealer does all the work for you in this case. All you need to do is select a car that fits your budget and needs.
Once you pick a car, the dealer fills out a credit application on your behalf. They submit it to several lenders and let you compare the different rates. This way, you can choose an option that best suits your car financing journey.
However, some dealers will present you with a higher interest rate compared to what the bank is offering and keep the difference. These dealers keep this money as compensation for handling the transaction. Therefore, you may not be getting the best offers when you go for the dealership car financing option.
Generally, a dealer will give you lower interest rates when buying a new car than when purchasing a used car. Some dealers even go a step further by offering promotional financing when you acquire a brand-new model. For instance, your dealer may offer you up to 0% APR to potential clients who qualify.
In some instances, dealerships may provide in-house financing. They are a unique brand that specializes in working with individuals with poor or no credit. You get to buy there and pay there, which can be convenient – depending on your credit score. However, this option is characterized by high-interest rates, down payments, and costs. There is also an increased chance of repossession if you fail to make payments.
Choosing an Excellent Option
As stated earlier, the best way to finance a car can be either through a dealer or a bank. However, you need to choose an option that meets your individual needs. It should be something that saves you the most money. However, most people can’t seem to figure out which option is best for them.
Therefore, it is best to first get preapproved by a credit union or bank before going to the dealer. You can then request them to also get quotes for you. Doing this ensures you can effectively compare all the options on the table.
However, it will take a bit of time to get quotes from different credit unions and individual banks. Ensure you exercise patients and hold on until every offer gets to you. It is easier to choose the best options once you have explored all the avenues.
It is also better to look for bank car financing options despite having bad credit. Yes, interest rates may be a little higher than what you want. However, it will save you the headache that comes with buy here, pay here dealerships.
Finally, keep in mind that auto loans will affect your current credit scores. For starters, the lender will run a hard credit check every time you apply for a car loan. The process knocks you down a few points.
Applying for several loans over an extended period will compound the negative effect on your credit score. However, rate shopping done within a short period – preferably less than 14 days – will not have such a huge impact. All these inquiries get compounded into one during credit score calculations.
Ensure You Are Financially Prepared Before Getting an Auto Loan
First, how to finance a car through a bank or a dealer is a vital consideration. However, it shouldn’t be the only thing you have on your mind. It is equally important to prepare yourself in other ways – starting with checking your credit score. You can take several steps to improve your credit score if it needs work – like catching up on due payments and limiting how often you apply for new credit.
It will also help to save towards your down payment. The more you have to put down, the less you will need to finance. Therefore, you can benefit from paying considerably fewer interest rates over the loan period. Do not forget to also check to ensure you can make steady monthly payments towards repaying the loan.
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Recommended reading: Do you need good credit in order to buy a car?
