Should you get a car loan from the dealership?


If you are buying a car soon, you will need to find financing to ensure the transaction goes smoothly. You have the option of financing the car through your bank, credit union, or online lender. Or you can use the internal financing offered by the dealership.

It can be tempting to get an auto loan from the dealership because it’s convenient and you can handle the whole transaction in one sitting. Still, it might be best to seek financing elsewhere, as shopping around often opens the door to better deals.

3 reasons not to take out your car loan at a dealership

There are a few key reasons why it may be better to obtain financing from a bank, credit union, or online lender rather than a dealership.

1. You can save time in dealerships and negotiate more effectively

If you go to the dealership pre-approved for a car loan, you will save time and have more control during negotiations. In terms of time savings, you won’t have to fill out a loan application and wait for the dealership to round up your information from the lenders they partner with.

Plus, you’ll have more leverage to negotiate the best deal on a vehicle without having to worry about financing. You may also have the leverage you need to negotiate a lower interest rate if you still want to explore dealer financing.

The car salesman’s attempts to convince you to explore more expensive vehicles will likely also be unsuccessful. Some car salespeople lure customers in with low monthly payments, when in reality they’re just extending the term of the loan to get you a “better deal” that costs more interest. But with a loan offer in hand, you can politely decline their request.

2. Dealers can mark up interest rates

When you finance through a dealership, they do all the legwork for you. It is therefore not uncommon to receive a higher interest rate than you could qualify for if you obtained financing yourself.

The rate difference, or markup, is how the dealership is compensated for handling the financing portion of the transaction. Considering it’s relatively easy to shop around and apply for a car loan, it might not be wise to pay the higher interest rate.

3. You might get a better rate from your bank or credit union

It is not uncommon for banks and credit unions to offer better rates to existing customers. However, dealerships see all customers the same way, although having good or excellent credit means you’ll get better loan terms.

You will usually get the best offer from credit unions. They are owned by their members and focus on maximizing cost savings for account holders.

In fact, the average interest rate for a 60-month new car loan from a credit union was 2.79% in December 2021, according to National Credit Union Administration. However, the same loan from a bank carried an interest rate of 4.71%.

Is dealer financing ever a better deal?

You will likely get a car loan at a competitive rate from your bank or credit union. However, there are instances where dealer financing might be a better deal.

  • The dealer offers promotional fundingas low as 0% APR (annual percentage rate), on select new models when you fund internally.
  • The dealer can match or beat auto loan the offer you received from your bank, credit union or online lender.
  • You have bad credit and cannot be approved for a subprime loan elsewhere.

Next steps

When you’re ready to apply for a car loan, check your credit score to avoid any surprises at the dealership. Also, research lenders to find the best options. Consider using Bankrate auto credit search to view quotes without affecting your credit score. But if you don’t like the quotes you receive or if your credit isn’t perfect and you’re having trouble getting approved for a loan, it might be worth exploring dealer financing.

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