What is the difference between dealer-arranged and bank financing?

With bank or other lender financing, you go directly to a bank, credit union, or other lender, and apply for a loan. These lenders can “preapprove” you.  If they are willing to make an auto loan to you, the lender will quote you  an interest rate, loan term (number of months), and maximum loan amount based on factors such as your credit score(s), the terms of the transaction, and the type of vehicle. This lender will then give you a quote or a conditional commitment letter before you go to the dealership. The bank, credit union or other lender offers certain terms, and those terms are negotiable.

With dealer-arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) chooses to finance your loan, they may authorize or quote an interest rate to the dealer to finance the loan, referred to as the “buy rate.” The interest rate that you negotiate with the dealer may be higher than the “buy rate” because it may include an amount that compensates the dealer for handling the financing.  Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms. Be sure to compare the financing offered through the dealership with the rate and terms of any pre-approval you received from a bank, credit union, or other lender. Choose the option that best fits your budget. After the auto purchase is finalized, the dealer-arranged loan may then be sold to the lender, who has already indicated a willingness to extend the credit.  That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights to other companies.

Some types of dealerships finance auto loans “in-house” to borrowers with no credit or poor credit. At “Buy Here Pay Here” dealerships, you might see signs with messages like “No Credit, No Problem!” The interest rate on loans from these dealerships can be much higher than loans from a bank, credit union, or other type of lender. You may want to consider whether the cost of the loan outweighs the benefit of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, or another dealer that is willing to make a loan to you. Another feature of this type of dealership is that your monthly payment is to the dealership. Some Buy Here Pay Here Dealerships, and some other lenders that lend to people with no credit or poor credit put devices in their vehicles that help them repossess or disable the vehicle if you miss a payment.

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In general, dealers and lenders are not required to offer the best rates available and you can typically negotiate the offered rate. You can save money over the life of the loan by getting quotes from multiple lenders, comparing offers, and negotiating for the best interest rate available to you.

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