If you are in the market for an automobile, you may have heard horror stories about people who waited to finance their vehicle until they hit the dealership floor, particularly if that individual went to a buy-here, pay-here lot. You may have even been told you should never use dealer financing. This is an over-simplification of the situation. While there are pros to finding your own financing, you may also get a competitive interest rate through the dealership. Here is a guide to help figure out whether you should finance your car through the dealership.
Before You Buy
No matter who ultimately finances your car, it is a good idea to get pre-approved for a loan before you even step onto the dealership floor. While it is easier and more convenient to drive to the dealership and arrange financing there, you can save time and money by first working through the financing process on your own.
There are a couple reasons for this. First, the process will help determine your credit rating, which in turn will help you figure out your interest rate. Pre-arranging your financing will also help determine exactly what you can afford as far as the purchase price and monthly payments. This will save time and frustration for you and your salesman.
There are a number of places to shop for a loan. You can get pre-approved through your primary bank, or you can visit a banking website. The better your credit score, the better interest rate you will be offered, so work to increase your credit score as much as possible before applying for financing.
At the Dealership
Since dealerships have access to alternative financing that the average consumer does not, they may be able to offer you a more competitive interest rate than the one given by your bank. Dealerships have a wholesale-type relationship with banks, which means they have more options and are often offered better interest rates. For example, you may be able to get a car loan at 4% APR on your own, but the dealership may be able to find you financing at 3.75% APR.
Know in advance it is in a dealership’s best interest to have you finance through them, as they get a small kick-back from the financial institution. Thus, on that 3.75% APR loan above, the dealership may get 0.25% from the bank as a thank you for the new account.
When working with the dealership financing professional, make sure you are comparing the monthly payment and interest rates with the same terms you had reached with your bank. This will ensure the dealership is using the same down payment and the same number of months as your other lender. The dealership may offer you a cheaper monthly payment by extending the length of your loan by several months or even a few years. While this will lower your monthly costs, it will increase the total amount you are spending on the vehicle.
Effect on Your Credit Score
Whenever you apply for financing, a hard pull will be made on your credit report, which means your financial institution will make an inquiry and the car dealership will make a separate inquiry. When you have several inquiries in a short period of time, it may lower your credit score. However, as long as you have not recently applied for a number of credit cards or a home mortgage, the dip will be slight and short-lived.
Ultimately, the question of whether you should finance at the dealership depends on the rates they are offering. As long as you carefully compare the rates offered by your bank with the financing offered by the dealership, you may be able to save money. Just make sure the terms are identical with both loans so the dealership is not tacking on unexpected costs in the form of a longer loan or larger down payment.