Should you finance your next car purchase at the dealership?
When it comes to financing a new (or used) car, there are a lot of “truths” out there, most of them contradictory. Some experts advise consumers to never finance through the dealership. Others warn that financing through banks or other institutions instead of the dealership is a big mistake.
The truth is somewhere in between those two extremes, and like all major decisions, there is no one right answer for everyone.
You’d Better Shop Around
The myth that it’s always better to arrange your own financing is rooted in the idea that the ability to shop around for rates and terms means you will always get the best deal, rather than find yourself locked into whatever the dealership might be offering. And while that can be true — and it is absolutely worth getting multiple quotes before making a decision — in reality, there are some downsides to that approach as well.
First and foremost, don’t just assume your banker will give you a better rate than your dealer. Because dealers push such a high volume of loans through their lending partners, they can often secure interest rates that are at least as good if not better than the bank’s rate. This is especially true for those with credit challenges — finance sources are often willing to bend a little more when dealing with a dealership, whereas an individual doesn’t have as much wiggle room to negotiate.
Second, when consumers come in with financing already secured, the dealership treats it as a “cash” deal, which has consequences. Manufacturer incentives, for example, are often only available for customers who finance through the dealer. That means those $1,000 cash back offers are null and void. In addition, on cash or pre-financed deals, the dealership is only making money from whatever slim margins they can get out of the car itself, rather than from a variety of methods a finance deal provides.
You may or may not agree with that strategy, but the fact is, the dealership is in business to make a profit, and if you’re paying cash — or bringing in your own financing — they have almost no incentive to negotiate a lower purchase price.
Another advantage to dealer financing is the ability to finance the total transaction, including title, delivery and other fees, as well as the protection products you will be offered by your dealership’s finance and insurance (F&I) department.
F&I products include vehicle service contracts, GAP coverage and prepaid maintenance plans as well as ancillary products such as windshield, tire-and-wheel and interior and exterior appearance protection. If a dealership is handling the financing, they can often roll those costs into the loan, spreading it out over the entire term. Without that ability to finance, however, if you are interested in those products, you either have to pay full price for them upfront or get a bigger check from your bank.
All that being said, there are benefits to securing financing ahead of time, as well. One of the biggest is the ability to do it in your own time and with much less stress and pressure. If you are negotiating a car loan with a bank or third party, you can often do it on your schedule, taking the time to think about each step. Plus, you’re not already attached to a specific car, so getting the financing doesn’t feel like a do-or-die situation.
Another stress-reducing benefit is the ability to focus on the cars, rather than on the negotiation and purchase process, when you have your loan in hand. You already know what you were approved for. Now all you have to do is test-drive vehicles until you find the right one for you, and you can enjoy the excitement of finding your new vehicle, rather than spend the day dreading negotiations or worrying that you’re not getting the best deal.
Financing is not a “one-size-fits-all” situation. Every person has their own credit history, their own likes and dislikes, and their own challenges. For some, the convenience and incentives that dealership financing offers is the best route to go. For others, the lower stress and higher certainty path of pre-securing financing will be a far better option.
The best place to start, for everyone in every situation, is doing your homework. Call a few banks and finance companies that specialize in auto loans and get quotes for what your interest rates would be and the amount you would be approved for. Then call a few dealerships and do the same thing. Shop around and ask questions, and in the end, you will get a deal that fits your financial situation.