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Bank or Dealership: What’s the Best Way to Finance a Car?

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If you’re buying a car and don’t have the cash to pay for it outright, you have the option to finance the purchase through a bank or a dealership. The right choice for you depends on a few different factors, and neither option is inherently better than the other for every carbuyer.

Here’s what to know about each option, so you can determine the best one for you.

Is It Better to Finance a Car Through a Bank or Dealership?

The decision on how to finance your vehicle purchase is a personal one, but depending on the specifics of your situation, one option may stand out as a better choice than the alternative.

Working directly with a bank to discuss financing before you head to the dealership could potentially help you save more money because it allows you to compare interest rates. Securing financing ahead of time also means there’s no chance of a dealer increasing the loan rate as compensation for its part in the process.

At the same time, the process of shopping around can be time-consuming, and it doesn’t necessarily guarantee a better rate—especially if you have great credit. These factors make dealer-arranged financing the choice that’s typically more convenient.

Financing a Car Through a Bank

Bank financing involves going directly to a bank or credit union to get a car loan. This allows you to cut out the dealer as a middle man and get preapproved for a loan before you ever set foot in the dealership. In many cases, the lender has a network of dealerships you can shop from and will give you instructions on how to complete the purchase using the loan.

Depending on the bank or credit union, you can apply online or at a local branch. In some cases, you may need to provide information about the vehicle you’re planning to buy.

Pros and Cons of Financing a Car Through a Bank

There are both advantages and disadvantages to going through a bank on your own to get an auto loan.

Pros

  • Could ensure you get the best terms possible: Dealers typically have a set of lenders they work with, and it’s possible to get better terms somewhere else. What’s more, the rate offered by a bank or credit union won’t include any dealer markup, which can happen when you work with a dealership to secure financing.
  • Could help you avoid additional costs: Having a specific approved loan amount on paper could also keep the car salesperson from trying to persuade you to include add-ons that you don’t need.
  • Saves time at the dealership: Once you’ve decided on a model, the financing process can take some time. In some cases, it can take several hours before you can drive the car off the lot. Having your financing taken care of up front can help you save time.

Cons

  • You’re not guaranteed a lower rate: While shopping around on your own improves your odds of getting a low interest rate, it’s not a guarantee. In some cases, the dealer may be running a promotion on newer vehicles, allowing you to get a rate as low as 0% if you have excellent credit.
  • Possible delays: If you don’t yet know which model you want, some lenders may not be willing to offer preapproval, delaying the carbuying process. In contrast, you can walk into a dealership and find a vehicle, then jump right into the process of financing with the dealer. Also, note that some lenders may require you to buy from a dealer in their network, which can require you to spend more time shopping if the car you want is at a dealership outside of the network.
  • You’ll have to navigate the process on your own: Shopping around for a car loan can be time-consuming, and if you’re buying a used car, you’ll have to look up vehicle and eligibility requirements on your own. If your priorities are saving time and simplifying the process, this option might not be a good fit.

How to Finance a Car Through a Bank

The process of applying for and getting approved for a car loan can vary depending on the bank. With that said, here’s a general idea of what you can expect:

  1. Prequalify with multiple lenders. Search for auto lenders online and, if possible, go through the prequalification process. This typically doesn’t require a hard credit inquiry, so it won’t damage your credit. Shopping around also allows you to compare rate quotes and other loan factors side by side.
  2. Pick a lender and apply. Once you’ve decided on a lender you like, submit a loan application. You may need more specifics about the vehicle at this point in the process, and you’ll also need to provide some documentation for your income, physical address, identity and more.
  3. Make your purchase. Shop online or visit the dealership and let them know you already have financing arranged. This essentially allows you to shop like a cash buyer. Your lender will give you instructions on how to complete the purchase using the financing.

Financing a Car Through a Dealership

Dealer-arranged financing works a lot like bank financing—the only major difference is that the dealer is doing the work on your behalf.

After you choose your vehicle, the dealer will have you fill out a credit application, which they’ll submit to multiple lenders. This allows you to compare rates and terms to choose the best option for you.

Another form of dealer financing occurs when the dealership provides in-house financing. These buy here, pay here (BHPH) dealerships specialize in working with people with bad or no credit. But the costs and down payment requirements on these loans are high, and there’s also a higher likelihood of repossession.

Pros and Cons of Financing a Car Through a Dealership

Before you decide on dealer-arranged financing, it’s important to understand both the benefits and potential drawbacks.

Pros

  • Convenience: If you don’t have time to shop around on your own or you don’t want to spend the time, having the dealer take care of the process can be incredibly convenient.
  • More flexibility: You won’t have to worry about being limited to dealerships within a lender’s network; you can focus your search on the vehicle, regardless of which dealer is selling it. You may also be able to get a better deal on your interest rate if you have excellent credit—some dealers even offer promotional financing rates as low as 0% for qualified borrowers.
  • More options if you have bad credit: If your credit is in poor shape, there are dealers that specialize in working with you and your needs.

Cons

  • Can be more expensive: In some cases, a dealer may negotiate a higher interest rate with you than what the lender offers and take the difference as compensation for handling the financing. In other words, you might not be getting all the information you need to make the best decision.
  • Less control: You won’t be able to pick which lenders the dealer sends your application to, which gives you less control over your loan offers.
  • Not available for private-party transactions: If you’re buying a car from a private party instead of a dealer, this option won’t be available to you.

How to Finance a Car Through a Dealership

As with lenders, each dealer may have its own approach to financing. In general, though, here’s what to expect:

  1. Visit the dealership. Visit the dealership and choose the vehicle you want to buy. At this point, you’ll want to negotiate the price to ensure you get the best deal. You’ll also want to talk about potential add-ons, such as a service contract or maintenance plan.
  2. Fill out a credit application. The dealer will ask you to fill out a credit application, which they will submit to multiple lenders.
  3. Choose the best offer. When the dealer returns with your offers, select the one with the best terms.

Prepare Yourself Financially Before Applying for an Auto Loan

Understanding how to get the best financing for your car is important, but it’s just as important to prepare yourself in other ways. For starters, check your credit score to see where you stand. If it needs work and you have time, consider taking steps to improve your credit before you apply.

Also, work on saving a down payment for the loan. The higher the down payment, the less you have to finance, and the less you’ll pay in interest over the life of the loan.

Finally, check your budget to make sure you can afford the monthly payment. The last thing you want is to drive off the lot in a car that will cause you more distress than joy.

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