Bank Car Financing vs. Dealership Financing

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January 27, 2012

Bank car financing is often better than car dealership financing when you are buying a car, particularly a used car. However, there are some occasions when dealership financing can be a good option, particularly for people with excellent credit. In order to properly find the right financing for your vehicle purchase, be sure to read the information below about what you should do while searching banks and dealerships and what you should know regarding the overall financing process for each.

What to Know and Do for Bank Financing

An excellent technique when you are considering financing from a bank is to seek pre-qualification for a loan. First, call several financial institutions such as banks or credit unions of which you are, or could be, a member. Ask about their rates, length of loans, and terms for different vehicles. Choose one or two institutions and fill out the application, explaining that you are looking for a pre-qualification on that particular loan. The institution will pull the information from your credit report, so there were be one or two queries on the report as a result. This generally will not harm your credit score since other lenders will see that you are car shopping. Once the bank or credit union financing is secured, you will then know exactly what rate and terms you will get from those institutions and you'll be in a position to evaluate any offers you have from dealerships. This also opens you up to the world of cars for sale by private owners, which can sometimes be a great deal. However, always have a car checked out by a trusted mechanic before you purchase it.

What to Know and Do for Dealership Financing

When you have chosen a specific car and you have negotiated a price on the vehicle, ask about the dealer financing options. Many dealerships make a good percentage of their profits from the interest charged on car loans, so they aggressively promote their loans. If the car you choose has no special rebates, interest rate packages, or special incentives, then be sure to compare the interest rates and terms of the loans you are pre-qualified for and the dealership loans. Remember that the better your credit is, the more options you will have on the dealership loans.

With regard to rebates, ask the dealership to write down all the terms of the rebate and financing for you. Then, you can properly evalutate the terms of the rebate compared to your bank financing offer. If the dealer offers rebates only if you accept their loan terms with higher interest rates, you need to compare the overall cost of the vehicle under standard financing and with the rebate. Also, another dealership offer, similar to rebates, is extremely low introductory interest rates, which then change to a higher rate after a year or two. Sometimes, the 0 percent or low percent financing lasts the length of the loan, but jumps to a higher rate if you are late on a payment.

Related Questions and Answers

Are Banks Willing to Offer Bad Credit/No Credit Car Loans?

Bad credit or no credit car loans are still available, but they are much harder to find these days. If you have a credit score under 640, you will be considered sub-prime by the majority of banks and finance companies. This means that you will have to pay a higher interest rate and the loan will have stricter terms. These loans will most likely require a down payment. If a down payment is not an option, the bank will probably require a co-signer that has a good credit score. As with all loans, it is extremely important that you read the entire loan document and ask questions about anything you do not understand.

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