When shopping for a car loan, the process is sometimes more difficult than shopping for the car itself. Loans from financial institutions, such as credit unions, and dealer financing serve as your two primary methods for obtaining a loan. Generally, credit union financing has more pros than cons, while dealership financing may be required if you can't come to an agreement with the credit union.
Credit Union
When you apply for a loan at a credit union, you have the opportunity to create a relationship with the lender, especially if it's a credit union you already belong to. By doing this, you can persuade the credit union that you are responsible with your finances by showing how you've paid back your past loans or lines of credit. You can also sit down and provide your credit report and point to your checking and savings statements as indicators of your healthy finances. All these personal interactions allow you to explain in detail that you're not a risk and that you will pay back the loan. Additionally, credit union financing is typically simple interest, which means interest is paid out evenly throughout the duration of the loan.
Traditional Dealer Financing
When you walk into a traditional dealer and explain that you need financing before you can purchase a car, the salesman will typically walk around with you until you settle on the car of your choice. Afterward, he'll sit down, take your financial information and begin sending the information to financial institutions that the dealer works with on a consistent basis. The dealer may also send your information to a manufacturer's financing department, such as Ford Motor Credit or Toyota Motor Credit. There's no personal interaction. If you are approved for a loan, it is based off your financial data alone; nothing you say will likely impact the decision. In addition, dealer financing may come with higher interest rates and front-loaded interest. Front-loaded loans result in a large portion of your payment going toward interest at the beginning of the loan and more going toward the principal payment at the end of the loan.
Buy Here, Pay Here Dealerships
Buy here, pay here dealerships offer financing at the dealership itself. There's no outside bank to go through. Typically, these dealerships offer loans that include higher-than-normal interest rates. These loans are almost always front-loaded. You must pay your loan payments at the dealership itself.
Making a Decision
If you belong to or live near a credit union, always attempt to secure a loan by visiting the credit union before going to the dealership. You'll likely get a better rate. If you cannot secure a loan from a credit union, visit a dealership, but bring a full range of financial information with you, including your credit report. If you believe the loans you're offered come with too high of an interest rate, present your credit report and explain why you should qualify for a better rate. If you have no credit or a poor credit history, consider visiting a credit union and a traditional dealership first. If you are not approved for a loan, visit a buy here, pay here dealership.
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