What Is the Difference Between Dealership Auto Loans & Bank or Credit Union Auto Loans?

When you borrow money to buy a car, you have the option of borrowing from a direct lender like a bank or credit union, or you can finance at the dealership. While these options ultimately get you in the car you want, the way they go about it can vary.

Pre-Qualification

When you work with a bank or credit union, you can get pre-qualified for the loan. This means that you can take your time, shop around and get pre-approved for the loan you want. This allows you to see what interest rates are being offered and if your credit is good enough to get the best rates. When you work with a dealer, you simply show up and deal with the financing after selecting a car.

Bad Credit Approval

One of the key differences between direct loans and dealer financing is the credit verification process. If you want to work with a bank or credit union, you must have a certain credit score. According to Consumer Affairs, most auto dealers have access to a captive lender that can work with customers who have poor credit. However, those with very bad credit scores can still be declined. When you have poor credit and get financing directly from the dealer, you will have to agree to a higher rate and payment.

Dealer Add-Ons

When working with a dealer, the financing department may try to add in extra items to the amount you are borrowing. For example, most auto dealers will offer gap insurance as part of your purchase and will add it to the loan amount. Gap insurance covers you when the balance on your loan is less than the insurance company pays if your car is totaled. The dealer may also try to get you to finance other items such as an extended warranty or a maintenance plan. When you finance outside the dealer, you will not usually have to worry about being asked to finance extra items.

Zero Percent Financing

Many dealers run zero percent interest financing offers from time to time. These offers make it possible for those with good credit to borrow money without paying any interest on it. To qualify for this offer, you must have very good credit. Traditional lenders do not offer this type of loan as they only make their money on the financing. Dealers can sometimes allow no interest loans because they make enough on the sale of the car.