Direct auto loans: What they are and why they’re better for most

Once you’ve zeroed in on your preferred color, brand and model for your soon-to-be car, the next step is deciding your buying strategy. Considering the high prices of new cars, it’s crucial to know the finance options at your disposal. The average price of a new car was $49,740 in December 2024, according to the latest data from Kelley Blue Book.

One of these options is direct auto financing, which is when you get financing directly from a lender. You may find a better rate by cutting out the dealership, which acts as a go-between in indirect financing. Consider the benefits before determining if direct financing is right for you.

What are direct auto loans?

Direct auto financing is one of the two most common vehicle financing options. With direct auto financing, you sign off with an online lender, bank or credit union.

Its counterpart, indirect financing, is when a car dealership or loan marketplace arranges funding by a third party.

Direct financing could be a hassle if you prefer a streamlined car buying and financing process. But dealer financing is not perfect either. Dealerships often mark up the rates their lending partners offer.

Direct vs. indirect auto financing

In the case of direct financing, you’ll work with a bank, credit union or online lender on your own. You can get quotes from several lenders and choose the best deal based on the terms, rate and other factors rather than simply taking what you’re matched with.

Once you’re preapproved, you can visit the dealership, pick out your vehicle, negotiate the best deal and sign the paperwork.

With indirect financing, on the other hand, you will be matched with a lender. This type of funding tends to come when working with a dealership or an online loan marketplace, like Autopay or RefiJet.

Despite having a guide through the entire process, this route has a major downside. The dealer will likely mark up the interest rate. So, it’s worth getting preapproved from an outside lender before shopping for a car and presenting it to the dealer to possibly negotiate more favorable loan terms.

How direct auto financing works

The process of financing your car through a direct lender varies, but these basic steps will always apply.

1. Apply for preapproval

Getting preapproved lets you shop for the best rate quotes among multiple lenders. Doing so allows you to act as a cash buyer because it shows the dealer that you’re serious about purchasing a car, which can help with negotiating the car’s price. You can choose from offered rates, loan terms and monthly payments among other features. Compare the auto loan rates offered by multiple lenders to make sure you’re getting the best deal.

2. Choose a lender and apply

Once you have prequalified with multiple lenders, you can choose the lender with the most favorable terms. You will likely need to provide proof of income, a Social Security number and a bank account number for verification to prequalify for a loan.

The lender will determine the loan amount they can offer based on your income, debt, employment and other factors.

3. Buy the car

You can then head to the dealership or shop around online. Since you already have financing lined up, you can shop like a cash buyer would. As a result, this puts you into a better position to negotiate the car price at the dealership.

4. Start making payments

You’ll need to begin making auto loan payments as soon as possible. Most lenders accept online payments, and you can sign up for this service by creating an online profile. You may also have the option to pay by mail or phone, but a processing fee may apply.

Where to find direct auto lenders

When looking for a direct lender, it is wise to start with institutions you already have an account with. If that is not an option, check out other sources.

Banks or credit unions

Many banks and credit unions offer direct auto loans, although they may have dealership limitations. If you have an account with a specific bank or credit union, you may get a decent rate even if your credit isn’t perfect. You may also want to to consider banks and credit unions is that, if you’re an existing customer, there may be a relationship discount that lowers your annual percentage rate (APR).

Online lenders

Many online lenders offer direct auto financing, like myAutoLoan or Capital One. You can often get financed the day you apply. Depending on the lender, you may not even need a car picked out.

Getting a loan from an online lender can be a good option if you prefer doing business from the comfort of your home instead of speaking to a lender in person. In addition, online marketplaces like Autopay allow you to compare potential offers from multiple lenders at once.

Captive finance companies

Captive finance companies are in-house financing entities owned by auto manufacturers. You can get vehicle lease and car loan options for cars made by the parent company. For instance, GM Financial offers both options for vehicles made by General Motors.

Some captive finance companies offer low or 0% APR deals for well-qualified borrowers, which could help you save thousands over the life of the loan. Plus, some companies may also provide cash back incentives for certain borrowers, such as recent graduates or military members.

Bottom line

Financing your car through a dealership is one of the easiest ways to acquire financing for a new vehicle. But whether it’s the right option depends on your circumstances. For example, if you already have a bank or credit union account, you may qualify for a lower interest rate through direct auto financing. Shop around with at least three lenders to ensure you get the best deal on a new auto loan.