Is It Better To Get a Car Loan From a Bank or a Dealer?

You have two options when you need an auto loan: financing a car through a dealership or getting a loan from a third party, like a bank. Even with growing options for third-party financing, dealerships still provide nearly 30 percent of all financing, according to Experian data. One major perk is the inherent convenience that dealership car loans offer — they can be seamlessly handled alongside your vehicle purchase.

But is it better to get a car loan through a bank or the dealer? You’ll generally be better off with a loan from a bank, credit union or online lender. Not only will this give you negotiation leverage, but you’ll likely find a better deal on interest.

What to know about bank financing

Banks typically have lower interest rates than you’ll find at the dealership. Get preapproved before visiting the car lot to find a potentially less expensive loan and give you a leg up during negotiations.

Even if you think you may use dealer financing, starting with loan preapproval from a bank, credit union or online lender helps you squeeze the most out of your auto loan. Outside lenders are often able to offer more competitive interest rates than dealerships and don’t need to mark up their rates to turn a profit.

Some banks offer a relationship discount on your annual percentage rate if you already have an account. But even if yours doesn’t, some banks will consider your banking history when evaluating your application. A long history of regular deposits and a lack of overdrafts could increase your odds of being approved.

Pros of auto financing through a bank

• Compare multiple options: A wide variety of direct lenders offer auto loans, and you generally don’t need an account to qualify. This lets you compare costs and find the most competitive auto loan terms.
• Autopay discounts: Some credit unions and banks, like U.S. Bank, offer discounts on your APR when you sign up for autopay through your account.
• Potentially lower APR: Some lenders reviewed offer rates starting under 6 percent. A dealership may be able to beat the rate your bank offers, but they’re only likely to try if you have a preapproved offer from the bank.

Cons of auto financing through a bank

• Longer processing time: Although major banks are able to make a decision on your application in a matter of days, some may take longer, especially if your bank requires you to visit a branch to apply. Online lenders often offer near-instant decisions, though.
• Strict eligibility criteria: Banks tend to require higher credit scores than dealership financing. If you have fair or bad credit or inconsistent income, you may not qualify with a bank. Credit unions and online lenders may offer more flexible options.
• May limit purchasing power: Some banks work with an exclusive network of dealerships. This may put vehicles at non-partnering dealerships out of reach.

What to know about dealership financing

Dealerships win for convenience — get your car and its loan all in one place. You may end up with a slightly more expensive loan, but some dealerships offer promotional rates on new car purchases that trump anything a bank can provide.

Dealerships partner with large banks, online lenders and credit unions to offer auto loans through their in-house financing department. Major auto manufacturers even have financing companies they own, called captive lenders. Captive lenders only finance their own brand — for example, Honda Financial Services only finances new Honda purchases.

A dealership is still a good option, especially if your credit isn’t in the best shape. And even if you get approved elsewhere, the dealer may offer better terms if you challenge them to beat your preapproved rate. The dealership may even be willing to negotiate more fees out of your contract if you use their in-house financing.

Pros of auto financing through a dealership

• Quick and convenient process: Finding and applying for a bank auto loan can be time-consuming. Dealerships can be one-stop shops — you can choose, finance and purchase your car all in a single visit.
• Manufacturer deals: If you borrow from a captive lender, you may be eligible for rebates and interest rate offers, including 0 percent APR.
• Less restrictive eligibility criteria: Dealerships often have a network of lenders, including some that work with bad credit. This means you may be able to qualify at a dealership even if you weren’t able to qualify with a bank.

Cons of auto financing through a dealership

• Higher interest rates: Dealers often mark up rates to turn a profit. If you don’t arrive with a preapproval offer in hand, you may be stuck paying a higher rate, allowing the dealer to make a profit.
• Longer loan terms: Dealerships may offer you long loan terms — sometimes up to 96 months — to keep your monthly payment low. But this means you may pay thousands more in interest.
• Only valid for cars on the lot: Dealership financing won’t cover other dealerships. If you can’t find a car for sale that you like, you will need to go to another dealer and see if you qualify for financing there instead.

Many dealerships are reputable businesses, but you should still be careful. If you have bad credit, you may find yourself at a less-reputable car lot, leaving you open to common auto loan scams like yo-yo financing.

Is it better to get a car loan from a bank or a dealer?

You don’t need to decide between bank and dealership financing right away. In fact, it’s beneficial to check your rates with a bank and some online lenders before you visit a dealership.

Often, you can obtain lower interest rates when you go directly to a bank or credit union. They can offer more competitive deals because you’re borrowing directly from them. When you finance through a dealership, the dealership acts as a go-between, which is why rates are often marked up.

Once you have preapproval from a bank or credit union, you can visit the dealership and shop for the car you want. When you apply for dealership financing, the finance office may be able to cut you a better deal if you already have a loan lined up. And many dealerships offer manufacturer deals, including rebates and other financing specials.

But you can always skip the bank and apply solely at a dealership. While it may not net you the best terms, it will save time. For some, a higher rate could be worth it for a simpler process.

Bank vs. dealership car loan: A comparison

Let’s assume you’ve done some research and have settled on a $30,000 car. Your preapproved rate at the bank is 5.75 percent, or 7.49 percent at the dealership. Here’s what your monthly payment and total repayment amount look like for each option:

Thanks to a lower interest rate, both your monthly payment and total amount repaid over the life of the loan will be less with a bank than with a dealership. Is the $1,470 worth the added convenience?

Use Bankrate’s auto loan calculator to test drive potential rates and terms and see how a loan could fit into your budget.

When is dealership financing a better deal?

While you will likely get a more competitive rate on your loan through a bank or credit union, dealership financing could be a better deal in some instances:

• The dealer offers promotional financing, as low as 0 percent APR (annual percentage rate), on select new models when you finance in-house.
• The dealership can match or beat the auto loan offer you received from your bank, credit union or an online lender.
• You have bad credit and can’t get approved for a subprime loan elsewhere.

Even with this in mind, you should still apply for prequalification elsewhere before visiting the dealership. Most lenders will only do a soft pull of your credit, so you won’t see a dip in your credit score. It will allow you to compare rates and understand whether the dealership is offering a good deal.

Bottom line

Determining the most cost-effective way to finance a car purchase is an important part of shopping for a new vehicle. While dealership financing can be convenient, it’s a good idea to shop around and lock in your auto loan rate before you visit the car lot to see what you qualify for. If the dealership can beat the bank’s offer, great. If not, you already have a loan in place to help with other aspects of negotiation.