Bank or Dealership: Where’s the Best Place to Get a Car Loan?
Many car shoppers will need to finance their purchase. There are two primary options when financing a car: the bank or dealership.
While many shoppers go through the dealership for convenience, this may not be the best choice. Is it better to finance through a bank or dealership?
Below we highlight everything you need to know about financing through a dealership or through a bank.
Table of Contents
- How Dealers Make Money from Loans
- Benefits of Dealer Financing
- Beware of In-House Dealer Finance Loans
- Financing Your Car Through the Bank
- What's the Best Financing Option?
- Prepare Financially Before Applying for an Auto Loan
- How to Get the Best Financing Deal from a Dealer
- Shop For Car Financing Before Going to a Dealership
- Best 0% APR Deals by Category
- Frequently Asked Questions
How Dealers Make Money from Loans
Before deciding whether to finance your car from the dealer or a bank, you should understand how dealers make money on car financing. Dealers are not the ones lending the money when you finance your car through a dealership. The dealerships work with lending partners to set you up with a loan.
When you get financing through a dealership, the dealer is acting as a middle man, which means you pay a commission. The dealer makes a commission for the financing deal through a finance reserve. The finance reserve is an extra percentage added to your interest rate, and it is typically somewhere between 1 and 3%.
Let's take a look at an example.
Imagine the dealer is able to get you financed for a 5% interest rate through one of their lending partners. This figure is the "buy rate", or the rate at which the bank is willing to lend you the money. What the dealer will show you is the "sell rate", which includes their commission. If the "buy rate" from the lending partner is 5% and the dealer's commission is 2%, they will show you a "sell rate" of 7% interest.
At first glance, just 2% may not seem like a huge difference, but over the life of your loan this adds up. Let's say you borrowed $25,000 over a 60-month term. Just the 2% finance commission would add up to $1,291, which is the profit the dealer would make on their 2% finance reserve.
Benefits of Dealer Financing
While dealerships do charge commission for financing, it's not always a bad option. There are several benefits to financing through a dealership including:
- Low Rates. Automakers sometimes offer very low rates as part of a promotion. Banks won't match these rates. These rates are usually reserved for well-qualified buyers.
- Shop Around. Dealers shop your credit profile around several banks, meaning they may be able to find lower rates than your bank.
- Simple. It's easy and convenient to finance through the dealer you buy your car from.
- Convenience. You can show up, finance your car, and drive away with it all in one day.
Beware of In-House Dealer Finance Loans
Some dealers may advertise in-house auto loans for borrowers with poor or little credit. For example, the "buy here, pay here" dealerships may advertise "No credit? No problem!" or similar sentiments. While these dealership loans may be incredibly enticing for car shoppers without strong credit scores, you should be wary of them. Typically, these loans have sky high interest rates. Instead, even shoppers with poor or no credit should see if there's another financial option able to make a loan.
Financing Your Car Through the Bank
There are several reasons to consider financing your car through the bank. If it's your local bank, you may already have a relationship, and be able to work with them should you fall behind on payments (this may be the case if you finance through a local bank or small credit union).
The primary advantage of financing through the bank is that the bank does not mark up interest rates. You're working directly with the lender, without a dealer as a middleman, which means you are likely able to get better rates.
However, financing through the bank is not a flawless option. Most times, dealer quotes and interest rates are negotiable, whereas the bank typically provides their final offer without negotiation. The bank also just gives you their offer, they don't shop your credit profile around different lenders like a dealer.
What's the Best Financing Option?
What's the best financing option? The bank or dealership? Well, it depends on your personal situation. The best option is the one that saves you the most money. While you may think that would be the bank since there's no added commission, that's not always the case. There's no set-in-stone answer for whether the bank or dealership is better.
In the next section, we'll break down how to get the best financing deal.
Prepare Financially Before Applying for an Auto Loan
Choosing your financing option is about getting the best deal for you. Doing so will require some preparation. Before applying for an auto loan, you should prepare yourself financially. You should check your credit score, taking steps to improve it if necessary. You should also save up money for the down payment, and check your monthly budget. Here are some tips on getting a financing deal.
How to Get the Best Financing Deal from a Dealer
As you can see, car financing can be very lucrative for a dealership. To get the best financing deal from a dealership, there are a few things to consider:
Don't Bring Financing Into the Price Negotiation
When you are shopping at a dealership, it's imperative that you do not bring up financing when negotiating the car price. Even if you're considering financing through a bank, do not tell the dealer when negotiating car price. If the dealer thinks you will not finance through them, then they are less likely to give you a deal.
Remember, the dealer makes money on loans, so they'll have a big incentive to offer deals to purchase if they think you may finance through them. Wait until after the price is settled to discuss financing to ensure you get the best car price.
Shop For Car Financing Before Going to a Dealership
To ensure you get the best financing price, you should shop around for your own car financing before heading to the dealership. Collect quotes online from lenders, and call banks and credit unions. Once you have financing rate quotes, then you can head to the dealer.
After settling on the car price, then it's time to negotiate financing. See what the dealer offers, then you can share your top quotes and see if the dealer can beat it. This is the best way to ensure you get a fair price from a dealer and will help protect you against high finance reserve rates. If the dealer can beat your best rates, it will be a great deal for you.
Buying a car is a big purchase, and it can be a frightening financial decision. For many car shoppers, the decision to finance through a dealership or bank can be confusing. In reality, it's all about which option provides you with the best price.
Frequently Asked Questions
How do dealers make money on financing?
Dealers earn money from adding a commission known as a "financial reserve" onto the interest rate. The financial reserve is typically between 1 and 3%.
Why do dealers want shoppers to finance through them?
Dealers make money through financing, so they have a financial incentive to get you to finance through them regardless of if the deal is best for you. That's why it's important to shop around for your own quotes first.
When should I negotiate car financing with a dealership?
You should negotiate car financing only after settling on the price. If the dealer knows you will not finance through them, they will be less likely to work with you on the price of the vehicle. Once you've committed to the price of the vehicle, the dealer will have more of a reason to negotiate financing with you, ultimately leading to you getting the best deal.
Is it better to get a car loan through your bank or dealership?
There are pros and cons to financing through both banks and dealerships. They key is to find the best deal for you. Shop around for quotes from online lenders, credit unions, and banks. After settling on the car price, see if the dealer is able to beat any of the quotes.
Should I get an auto loan before going to a dealership?
Before heading to the dealership, you should get quotes for auto loans from different lenders. However, we do not advise you to commit to a loan before going to the dealership. There's a chance the dealer may be able to beat your quotes and preapprovals.