Purchasing a new or used car is a significant financial decision, and how you finance your purchase will impact the total cost. While many car buyers opt for dealership financing, securing your own financing through a bank, credit union, or online lender may offer several advantages, including interest rates, lower monthly payments, and more transparent loan terms.
Whether you have excellent credit, bad credit, or something in between, exploring auto financing outside of a dealership when car shopping can result in savings.
How to Buy a Car With Non-Dealership Financing
- Can You Get Your Own Financing for a Used or New Car?
- Is It Better to Finance With a Dealership or a Bank?
- Will Financing With the Dealership Get Me a Better Deal?
- How to Get Preapproved for a Car Loan
Can You Get Your Own Financing for a Used or New Car?
Car shoppers are not required to finance through a car dealership when purchasing a new or used vehicle. Many finance companies offer auto loan options that may provide better interest rates and terms than dealership financing. If you want your car payments to be as affordable as possible it’s a smart idea to shop around and enter the dealership preapproved for the best outside loan offer you can find.
Is It Better to Finance With a Dealership or a Bank?
The decision between using dealer financing and securing a car loan through a bank or credit union depends on factors such as your credit score, financial situation, need for convenience, and preferred loan terms.
Dealership financing is usually the easiest method, since the car dealer manages the loan application process and often includes any add-ons, sales tax, and registration and processing fees into the loan as well as any deduction from a trade-in. (That may not be the case were you to use an independent lender.) Dealerships may also have access to special manufacturer incentives — such as a 0% annual percentage rate (APR) on new vehicles — but generally reserve those kinds of loan offers for those with good credit. If you have poor credit, a dealership will likely still find a financing option for you, assuming you can afford the high down payment and make your loan payments on a weekly or biweekly basis instead of monthly. But these kinds of terms are often difficult for people to meet, which can result in repossession.
Securing your own financing when car buying requires more effort on your part, as you’ll need to seek out the information and compare lenders, but it can be a better course financially. Banks and or credit unions have more incentive to ensure you have manageable terms and see the loan through to its conclusion. They’ll tell you if the model you’re considering is in your budget and often give you more favorable (and transparent) loan terms, including lower interest rates and monthly payments. If you have a preexisting relationship with this financial institution, all the better, as some lenders will provide special rates to borrowers who regularly do business with them.
Will Financing With the Dealership Get Me a Better Deal?
As mentioned above, some dealership financing options (including a 0% APR loan) are superior to what you can get from a bank, but these deals typically apply only on new-car purchases and to buyers with excellent credit. If you’re looking at used vehicles or have less-than-stellar credit, a credit union or bank may very well have better rates. It’s also important to know that even if you qualify for a reasonable loan rate, dealerships can increase the percentage by a certain amount to maximize profits, resulting in a higher total loan cost for you. That’s why it’s always a good idea to do your research.
If you are going to secure outside car financing, before you make a decision check your credit report and explore multiple lenders. To determine if you are getting the best deal, calculate the total price of the vehicle over the life of the loan (including the vehicle purchase price, fees, and the total interest paid) for each lender option, then compare these bottom lines.
And regardless of where you get your financing, review the loan terms carefully. Items like prepayment penalties and processing fees can increase the total cost by hundreds of dollars. If you are thinking of using your credit card for part or all of the down payment (if allowed), ensure there is no surcharge for using it.
How to Get Preapproved for a Car Loan
Getting a preapproved loan is simple. Here’s how:
Check your credit score and credit report
Your credit history affects your loan terms, so examine your credit report and dispute any inaccuracies with the reporting bureau. Note that your score may be slightly different depending on which of the three credit reporting agencies you pull from.
Compare lenders
Research credit unions, banks, and online lenders to get an idea of what each is offering for someone with your credit score. You can also search for loan offers across multiple lenders through loan aggregator sites, such as CarGurus’s prequalification page. (Prequalification usually doesn’t require a hard credit check, so entering your info shouldn’t hurt your score.)
Choose a lender and submit a loan application
Based on the offers you see, select the best and provide that financial institution with all the necessary information. This may include details about the vehicle you wish to buy as well as documents proving your identity, income, address, and more. The lender will then provide you with a preapproval letter, showing your loan amount and interest rate.
That’s it. Take your preapproval letter with you on the day of your test drive and negotiate the price of the car with the salesperson independent of dealer financing.
