Buying a car whether it’s new or used is something to get excited about. However, one of the problems one might face is how to get a source of financing for this new set of wheels.
There are a handful of options available when it comes to financing a new car. Two of the most popular sources are bank loans and dealer financing. It’s imperative to know the differences, pros, and cons of these two financing options so that you can select the best one for you.
Difference between Dealer Financing and Bank Loans
In dealership financing, the dealer contacts their bank or any loan company and helps you get a loan for the car you intend to purchase. The dealer collects your financial information and forwards it to one or more potential lenders. All the necessary arrangements and negotiations are done by the dealer while you do very little. Sounds great, right?
On the other hand, a bank loan is when a buyer (that’s you) applies for a loan directly from the bank or a loan company. You process and arrange all the details of the loan yourself. Then you use the money (loan) to purchase the car from the dealer.
Why Would You Choose a Bank Loan?
As mentioned earlier, a bank loan simply means that you are the one that makes contact with the bank or the loan company. If the bank pre approved you for a loan, you would be given a quote which states the interest rate, maximum loan amount and loan payment period (number of months). These figures largely depend on some factors such as your credit score, your debt-to-income ratio, transaction terms and the type of vehicle you want to purchase.
However, this may seem like an extremely stressful and time-consuming exercise, but it can pay off in the long run.
There are several benefits of financing a loan from your bank, here are some of them.
- Your bank knows you: Getting a loan from your bank can be easier since you have an existing relationship with them. This may get you a better rate, and if you happen to have any issues with the loan later, you can quickly get in touch. Borrowers often get the best rates when they obtain loans from their own banks.
- Great negotiating power: When you are dealing directly with the lender (in this case your bank) then you are in an excellent position to negotiate a more suitable payment structure and loan term.
- Better interest rates: You can get the best deal possible from your bank especially if you have a good credit score. Dealers offer their own interest rates which are sometimes higher than the bank’s rates.
The drawbacks of a bank loan
- It can be stressful and time-consuming: You call the banks yourself and perhaps fill out a few forms online or at the bank itself. This can come with a lot of stress. Moreover, the whole process can take a longer period.
- Strict qualification terms: Banks usually have strict qualifying standards for auto loans than dealers do. Banks do not offer cash loans for bad credit because they have more stringent credit requirements and you might not be eligible if you don’t have good or excellent credit.
Why Would You Opt for Dealer Financing
You can get a good deal when you obtain financing through the dealership. Here you have the chance of getting an auto loan and buying a vehicle from the same place. Sounds convenient!
But that’s not the only reason why dealership financing might seem like a good option.
The benefits of dealer financing
- They make the loan process simple and straightforward: You tell the dealer how much you can afford for a monthly payment and they negotiate all the details with the bank or lending company.
- It’s an option if you have bad credit: Dealers usually have a relationship with many finance companies so they can offer buyers more financing options than banks. Moreover, if you have a few credit problems, you’re more likely to get financing through a dealership than a bank. This is a huge advantage for buyers with a low credit score.
- The dealer will ensure you get a loan: The dealer is experienced and invested in this loan application; after all, selling the car means more profit for them. With that in mind, you know they’re putting out their maximum effort to ensure that you get a car loan.
The drawbacks of dealer financing
- It could cost you more: The interest rate on loans from these dealerships can be much higher compared to loans from a bank, credit union, or other types of lender. This is because some dealers increase the interest rates that their financing companies offer thereby charging buyers higher rates. Most buyers don’t realize the dealer has marked up the interest.
- Low negotiating power: With you completely removed from the negotiating process, you just have to trust that the dealer to get you the best deal in the market.
So Which Option Should You Go For?
You’ll want to start with a credit assessment when determining the right choice. People with good credit should go with a bank. They will pay less interest, which means they will pay less for the car in general.
Those who have bad credit but need to purchase a vehicle can benefit from dealerships. However, you should consider the cost of interest. Shop around and find a relatively fair interest rate that is affordable.
No matter the option you choose when car shopping, you should always research your options thoroughly. Make sure you carefully examine and understand the terms (payment, length and interest rate) of all offers.