Is it better to get a car loan from a bank or a dealership? Most people will tell you the bank is better, and that’s mostly (but not always) true. While there are benefits to getting a car loan from a bank, there are some situations where it is better to get a loan from a dealership. Here’s what you need to know.
Getting a loan from a bank
There are a couple of big reasons it may be better to get a loan from a bank than a dealership for a car. First, banks are established lenders. They have strict standards of operations and larger cash flow. This means your auto loan isn’t going to make or break them, so they can afford to set and stick to ethical and clear terms.
Second, banks often offer pre-approval for car loans. This means you can get a letter of approval for a set amount. After comparing car loan quotes from several lenders, you can shop around for the car you want, knowing how much you can finance. Dealerships may also be more inclined to negotiate the price with the assurance you can pay it.
The potential cons of getting a loan from a bank is you may not get the best interest rate unless you’re already a preferred customer. Banks are usually more inclined to extend funds to individuals with whom there is already a relationship. For this reason and the relatively low potential for profit for the bank on an auto loan, non-customers may have difficulties getting an auto loan at all from a bank.
Getting a loan from a dealership
The biggest advantage of getting a loan from a car dealership is convenience. All you have to do is pick the car you want and let the finance department of the dealership do the legwork. While this may mean you sit in the showroom reading magazines or scrolling through social media on your phone for a bit, there is very little you must do aside from signing the paperwork.
Dealership loans tend to be better for those with limited monthly budgets, as there are options to lower monthly payments and reduce the upfront costs that may not be available through a banking institution. Dealers can negotiate high loan-to-value ratios, which basically allow car buyers to finance more of the car’s cost than is typically permitted through a bank. Options like 0% down payment and extended terms are possible with dealership loans.
The primary disadvantage of getting a loan from a dealership is that it typically costs more in the long run than a loan through a bank. Dealerships tend to mark up interest rates to put a little extra in pocket, and there are often add-ons like extended warranties or service agreements that fatten their purses as well.