Pros & Cons Of Auto Dealer Loans

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, - May 26, 2016

Auto dealer loans have many pros and cons, most of which the average consumer is unaware of. Dealer financing, at times, has acquired a nasty reputation. For the most part, this reputation is unjustified. Although dealer financing certainly has its cons, it has plenty of benefits as well. Whether or not an auto dealer arranged car loan is right for you depends on your particular circumstance. Read on to learn more about the pros and cons of dealer financing, and determine if it's right for you.



Financing a car with the car dealer can make the financing experience more convenient. Instead of faxing or delivering important documents (such as a buyer’s order or bill of sale), and traveling to multiple locations to sign your paperwork, you can use dealer financing to save time. Most auto dealers are “one-stop shops” that effectively arrange financing for you, or provide their own financing (Buy-Here-Pay-Here).

Extended Terms

Auto dealer financing may offer more liberal auto loan terms. Most banks and credit unions only offer extended-term financing (e.g. 72 months) on new or demo vehicles, whereas some dealers can arrange long-term financing on vehicles a few years old. Extended terms cost you much more in the long run, but they are perfect for the buyer with a limited monthly budget.

Higher Advance (Loan-to-Value Ratio)

While many banks and credit unions are relatively strict regarding their advance, some auto dealers can arrange financing with aggressive loan-to-value ratios (Ex. 115% of value versus 90% of value). While no one desires to finance more than the vehicles value, this is required as more consumers trade in while “upside-down” on their trade-in vehicles.

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Sometimes Costly

Interest rates through auto dealers can be competitive with banks and credit unions, but many times, they are more costly. Even if the difference seems minor (e.g. 6.9% versus 5.9%), it can add up to a substantial sum over the course of an auto loan. One of the reasons they are often more costly, is because dealers tend to “mark up” or “add points” to the initial interest rate offered by the financial institution they are working with. This is certainly not unethical, nor is it illegal; it’s simply a commission for arranging the financing. However, it can cost you.


When financing with your bank or credit union, you will sign your loan paperwork with an experienced professional who is able to identify common “add-ons” or “extras” that may be unnecessary. While some of these extras present a legitimate product, others are useless or unnecessary.

Third-Party Woes

Working with your bank or credit union gives you the opportunity to deal with someone you know and trust. Whereas accepting dealer financing puts you in contract with someone you’ve never met—a third-party bank or auto finance company. Check the Better Business Bureau rating with any auto finance company or bank you aren’t familiar with; some are notorious for providing mediocre customer service.

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