Is it better to finance a car through a bank or dealership?

You have two options when you need an auto loan: financing a car through a dealership or getting a loan from a third party. Even with growing options for third-party financing, dealerships’ captive lenders still provide over 30 percent of all financing, according to Experian. 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 a dealer? You will 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.

Bank financing vs. dealership financing

Pros and cons of auto financing through a third-party lender

Getting preapproved for a car loan from a direct lender will aid you in negotiation, save you time and likely get you a better interest rate than you would qualify for at a dealership.

Even if you think you may use dealer financing, starting with 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 look at your banking history when evaluating your application. If your banking history shows a healthy pattern of deposits and a lack of overdrafts, it could increase your odds of being approved.

The application process is straightforward for most major banks and credit unions. Many offer online applications that allow you to get prequalified for an auto loan so you can see your likely rates. After, you can apply for preapproval. It will temporarily lower your credit score by a few points, but it allows you to go to the dealership and negotiate like a cash buyer.

Pros of auto financing through a bank

Financing a car through a bank or other direct lender may help you score low interest rates on an auto loan. And you don’t need to have an account to qualify with most banks.

• 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 to your APR when you sign up for autopay through your account.
• Potentially lower APR: Some lenders Bankrate has 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

While banks may be better for people with good or excellent credit, they can take longer to get — and they limit who is able to qualify.

• 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 better credit scores than dealership financing. If you have fair or bad credit or inconsistent income, you may not be able to qualify with a bank. Credit unions and online lenders may be more flexible.
• May limit purchasing power: Some banks work with an exclusive network of dealerships. This limits your buying and negotiating power if outside dealerships are able to offer more competitive prices.

Pros and cons of auto financing through a dealership

Getting financing through a dealership is fitting for those who want the ease of a one-stop shop and have strong credit.

Dealerships work with large banks, online lenders and credit unions to offer auto loans through their own financing division. Some major auto manufacturers even have financing companies they own, called captive lenders.

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.

Pros of auto financing through a dealership

Dealerships cater to a wide range of borrowers. For some, this may mean they are able to beat the rate your bank has quoted you. For others, you may be able to qualify for dealership financing even if you don’t qualify at a bank.

• Quick and convenient process: Finding and applying for bank auto loans takes time. Dealerships can be one-stop-shops — you can choose, finance and purchase your car all in a single visit.
• Manufacturer deals: If you shop at a dealer that is associated with a manufacturer, you may be able to take advantage of rebates and interest rate deals, 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

Dealerships are able to help borrowers who may not qualify at a bank or other lender. However, the financing you receive will only be good for the cars for sale on the lot when you visit — and, of course, you will likely face markup that a loan from a bank doesn’t have.

• Higher interest rates: Dealers often mark up rates to turn a profit. If you don’t come with a preapproval offer in hand, you may be stuck paying a higher rate just so the dealer can make money.
• Longer loan terms: Similarly, 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 good 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.

The primary benefit of going directly to a bank or credit union is that you will likely receive lower interest rates. They can offer more competitive deals because you are borrowing directly from them. When you finance through a dealership, the dealership acts like a middleman — which is why rates get marked up.

Once you have preapproval from a bank, you can go to 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 more simplified process.

Is dealership financing ever a better deal?

While you will likely get an auto loan with a more competitive rate through a bank or credit union, there are instances where dealership financing could be a better deal.

• 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 these 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 give you the opportunity to compare rates to what the dealership offers.

Next steps

Overall, applying for outside financing before you visit a dealership is the best move. By doing this, you can 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.

So lock in your auto loan rate by applying for preapproval with a bank or other lender first. Then be prepared to negotiate at the dealership to get the best terms possible.