Is Getting a Bank Loan for a Car a Good Idea?

Purchasing a new car, or even a used one, is a thrilling experience. But if you’re financing the purchase, the procedure might be intimidating.

You might be thinking, “Should I finance my automobile through the dealership or a bank loan? Even though doing the entire purchasing procedure in one place might seem more convenient, you might not end up getting the greatest value.

It’s a good idea to do some research before deciding where to receive money for your automobile purchase. Even before you locate the automobile you want to buy, you can be pre-approved for a loan through a bank or credit union, which can help you create a budget.

After a home, a car is frequently the second most expensive investment a person will make, so it is strongly advised to look into various financing possibilities.

Getting a loan from a bank or credit union or getting a loan from the dealership are the two primary ways to finance a car purchase.

Using a Bank to Finance the Purchase of a Car

The first stage in the financing process is speaking with a representative at a bank or credit union before you go to the dealership to purchase a car.

Before you even begin looking, you can get prequalified, giving you additional purchasing power when you enter a dealership or private party transaction. You may show the exact amount you can afford to pay for a car by getting pre-approval.

While some banks only offer services online, others have physical offices. Because they don’t have the overhead expenses associated with running local offices, online banks can have lower interest rates and better bargains to offer borrowers.

Instead of only getting a loan from the bank where you already have other accounts, it is wise to shop around and examine alternatives at several financial institutions. Bank and credit union rates often reflect current market circumstances and do not include markup.

It’s important to shop around before financing through the dealership because a marked-up interest rate can end up costing you a lot of money over the course of the loan. Some auto dealerships mark up their prices to generate more revenue or only provide cheaper prices to customers who buy new models.

The initial estimate you receive from a bank is not the actual sum. In order to calculate the interest rate for which you are eligible, the professional you are working with will check your credit and examine the report.

Furthermore, banks and credit unions frequently charge varying interest rates for new and used cars. Starting the financing procedure before you find the automobile you want will save you time and hassle because some lending companies impose mileage and age restrictions.

Getting a Car Loan at the Dealership

Finance experts that can offer a few solutions work in the financing divisions of most vehicle shops. Dealers will submit your information to several lenders they have links with in order to obtain estimates.

However, there are times when a dealership’s financing team will present you with a rate that is higher than what the lender would provide. As payment for handling the transaction on your behalf, the dealership would keep the difference.

You may make sure that the financing alternatives offered by the dealership are reasonable by independently evaluating interest rates and loan options. If the rate isn’t competitive, you can inquire about your eligibility for a cheaper rate or just apply for financing directly through the bank or credit union.

The finance experts may give you a better rate if you mention your intention to go elsewhere because car dealerships frequently bank on making additional money by handling financing in-house.

If you have bad credit or no credit history, you might be tempted to finance a car through the dealership. Dealers with a focus on second-chance lending for people with bad credit are available.

Before agreeing to a bad credit auto loan, it’s crucial to consider the interest rate. Over the course of the loan, you can pay significantly more.

An client with a subprime credit score between 501 and 600 is normally eligible for an average loan rate of 17.78% for a used vehicle and 11.33% for a new vehicle, according to a 2020 Experian report.

The average interest rate for all buyers in 2020, according to the Federal Reserve, was 5.14%, which is a big difference. If you bought a car for $10,000, the higher interest rate would cost you more than $1,700. The 5% interest rate, however, would cost you an additional $500.

Benefits of Bank or Credit Union Financing

It’s helpful to think about a few advantages of the latter choice when deciding whether to get financing through a bank or credit union or through the dealership where you want to buy your car:

No-pressure shopping

At auto dealerships, the sales staff often receives commissions for each vehicle sold. They are therefore more inclined to exert pressure on potential customers in order to increase sales. Some may even exert pressure on you to obtain financing from their location because they are aware that doing so increases the dealership’s profits. But it’s more difficult to make a wise judgment when you’re under pressure.

A bank representative, on the other hand, often doesn’t get paid a commission on the loans they close. Given that taking out a loan may not be in their best interests, they are less inclined to exert pressure on you. Additionally, bank staff could present you with a range of choices, such as a loan with a longer duration and lower interest rate or one with a shorter period that you can repay fast.

Create a budget before you go shopping.

Before choosing a car, you can be pre-approved for a loan with a bank so that you can create a precise budget based on what you can afford. If you begin the car-buying process at a dealership, a brand-new model with the newest amenities can influence you even if it is out of your price range.

Employees at the dealership may use various strategies to get you into the automobile, such extending the loan’s duration, but you risk accruing more interest or having to make car payments that you cannot afford.

To prevent falling in love with a car that is out of your price range, it is best to start looking at cars with an idea of what you can afford. To obtain an exact monthly cost when comparing loan alternatives, remember to take your down payment into account.

Boost your purchasing power

When you visit a dealership, having preapproval can give you additional negotiating leverage because you can make cash-only purchases. You can bargain with the salesperson using the knowledge that you have about how much money you have to spend on a car.

You can avoid the chat with the financing department and concentrate your time and attention on locating a vehicle and negotiating the price by arriving with a plan for financing from a different source.

The dealership salesman will be forced to work with you and the amount you have been approved for by the bank or credit union if they want to close a deal. Having a limited amount you can pay discourages dealerships from trying to upsell clients on extra packages and features.

Individualized Service

When you arrange financing through a dealership, you might speak with a local finance expert, but the actual loan will likely be handled by a national lender. You might not receive much in the way of individualized service as a result after it closes.

Local banks and credit unions may often offer their members a higher caliber of service. You can explain your situation to a bank employee personally if you miss a payment. They are more likely to cut their losses and move on, though, if the loan is through a lender that has no direct connection to you.

A dealership’s financing options have advantages.
There are a few advantages to financing through a dealership, particularly for those in particular situations.

Minimum Interest Rate

If you’re purchasing a new vehicle, it may be worthwhile to think about financing through a dealership because many automakers provide special financing on recently released models. For as long as the promotional rate is in force, you won’t be required to pay interest if you are eligible for a 0% annual percentage rate (APR). To be eligible for promotional prices, buyers typically need to have great credit.

Dealership Rewards

To encourage customers to buy and finance vehicles through authorized dealerships, certain automakers offer incentives. As an illustration of an incentive:

  • Discounts are provided to buyers who already possess or have previously owned the same vehicle brand through loyalty programs.
  • Bonus money: This is a discount that is frequently given to a particular group, like members of the military or recent college graduates.
  • Cash back: This is an incentive that customers may receive when purchasing a vehicle before a specific date. It can range from $500 to $5,000 or more, and is often provided in the form of a discount rather than a check.

Manufacturers may also offer incentives to dealerships, which they may subsequently give to their customers. Dealer cash and awards, often known as kickbacks, are among the dealership incentives that are offered when particular objectives are reached.

Choices for Purchasers with Bad Credit

As was previously indicated, some dealerships provide second-chance financing to customers with bad credit. Going via the dealership for financing can be your only choice if you can’t be approved for an auto loan through a bank or credit union but you truly need a dependable car.

Selling a Car

You might believe that getting finance through the dealership is required if you’re trading in a car as part of the buying procedure. The trade-in value is typically deducted off the invoice, so when you go to buy the automobile, your final price will be lower.

Whether you’re applying for financing from a bank or a dealership, you’ll need to say whether you have a car you want to trade in and how much you think it’s worth.

The dealership will simply reduce the purchase price when you trade in your automobile, which will result in a cheaper loan amount. Your monthly payment for the new vehicle will also depend on the value of your trade-in and your down payment.

Applying for a Car Loan

You must provide personal information, such as your name, contact information, and Social Security number, in order to finance a vehicle through a bank. If you’re a strong candidate for a loan, the bank agent can pull your credit history and report. To determine how much you can afford to pay each month, they will also examine your income level and debt-to-income ratio.

It’s ideal to submit your preapproval application no later than one month before you intend to buy a car. If they happen within 14–45 days of one another, numerous credit inquiries will only be counted against you once. But if you put off making a purchase for too long, the bank will need to test your credit again, which can make it harder for you to get approved.

You can begin looking for your next ride once you have submitted your information and received preapproval. Both new and used car models are eligible for bank financing, and the majority of banks don’t have a limit on how much a consumer can borrow for a car. You can give the bank the information once you select an automobile that satisfies your demands and falls within your price range. In addition to the name of the dealership or private seller, they will require the vehicle identification number (VIN).

Once everything has been approved, the lender will either send the money to pay for the car directly to the dealer or private seller, or it will send it to you so you may pay for it yourself. In most cases, you’ll begin paying monthly payments within 45 days of the loan’s closing. Your lender will give you specifics of how to send payments and when they are due each month, including where to send them.

Car Leasing vs. Financing

You could come across information regarding leasing when reviewing financing choices and question if it’s a good choice for you. Only dealerships provide leasing choices, and the majority of them only let consumers lease new cars. With a lease, you can drive an automobile for a predetermined period of time in exchange for a set monthly payment. When the term is up, you can either give the car back to the dealer or, if your contract permits a buyout, you might be able to pay the balance and keep the car.

Leasing offers from dealerships are alluring since they frequently have substantially lower monthly payments. For hundreds less each month than you would if you financed it, you could drive away in a brand-new car. It’s crucial to realize that your monthly payment accomplishes nothing to advance your goal of paying off the car. Instead, you’re paying that set sum to have access to the car.

Additionally, lease contracts contain mileage restrictions, so if you drive a lot, leasing a car might not be the best choice for you. If you exceed the allotted amount, you will be charged a per-mile fee to make up the difference. Furthermore, leased automobiles must be returned in top shape. The lessee could face further fines and penalties for any damage.

The financial expert will give a residual value of the car at the conclusion of the term if a lease agreement has a buyout option. Although the car will no longer be leased, the lessee can pay that sum in cash or through a finance arrangement to keep it.

Favorite Banks for Auto Loans

It’s useful to take into account a few aspects while evaluating the auto loans provided by regional, national, and online banks and credit unions. The first is the interest rate that is offered, which is determined by your credit score and financial background. Additionally, you ought to consider the conditions provided, the caliber of the service, and any unique offers that might be provided. Top-rated institutions that provide auto loans include:

Auto financing from Capital One

If you have bad credit and may not be approved by other lenders, Capital One Auto Finance is a lender to take into account. This organization offers anticipated interest rates and loan terms without conducting a hard credit check, so you may apply for prequalification without worrying about how your credit score will be affected. However, if you use Capital One Auto Finance to finance a car purchase, you can only visit the dealerships that the company partners with.


Providing loans for both conventional automobiles, trucks, and SUVs as well as recreational vehicles and motorbikes, LightStream is a part of Truist Bank. As long as the interest rate and loan meet specific requirements, it offers a Rate Beat program that will beat any competitor’s interest rate by 0.1%. LightStream occasionally has the ability to deposit the funds into the applicant’s bank account on the same day, which might speed up the car-buying process.

America Bank

Only a small number of lenders, like U.S. Bank, offer identical interest rates for both new and used cars (up to 6 years old). It’s wise to research the rates available for your purchase if you’re looking at used cars because lenders typically demand higher rates for them. Although U.S. Bank offers preapproval online, you must visit a location to complete the application. People residing in the other 24 states would not be qualified for financing as this bank has offices in 26 states.

American Bank

Various auto loan options are available from Bank of America, including those for purchases from private sellers and some dealerships including CarMax, Enterprise Car Sales, and Carvana. If you are currently a member, you may be eligible for a rate reduction of up to 5%. You must be a Preferred Rewards client and maintain a minimum amount in your account in order to be eligible for the greatest discount (s).

Due to the fact that buying a car is an expensive investment, many individuals use financing. However, skipping the research stage and not considering all of your options when making financial arrangements is a mistake that could end up costing you a lot of money over the course of the loan. To get the greatest deal, it’s essential evaluating loan options rather than just utilizing the dealership out of convenience.

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