Personal Car LoanBanks vs. Car Dealerships vs. Online Lenders: Which Should You Choose?

Banks vs. Car Dealerships vs. Online Lenders: Which Should You Choose?

October 05, 2014

If you’re looking for a car loan, you have a few choices as to where you get it from. There are several different types of lenders, and each has their benefits and drawbacks. Here’s an overview of the typical options you’ll have—and the pros and cons of each.

Financing Through a Dealership

Dealers sometimes give good deals. But they also make commissions off loans. Some car salespeople will tell you that it’s the loan, not the sale of the car itself, that actually makes money for a dealership. Dealers may also try to negotiate you into buying more car than you can afford by keeping the focus on the size of your monthly payment instead of the size of your payment overall.

In addition, it isn’t unusual for dealers to give loans only to people with excellent credit. If you have less-than-optimal credit, you could get a significantly worse deal from a dealer—or no deal at all.

Dealers might also charge high fees, even with loans that initially look like a good deal. Check the origination fee and other costs to make sure you’re not being overcharged. Be sure you can pay off the loan early without incurring additional costs.

Financing Through Your Bank or Credit Union

You don’t have to get a loan through your dealer—and getting the loan ahead of time can be a better option. If you apply for a loan before you shop for a car, you may be able to stick to your budget better. You’ll also be in a strong negotiating position, walking into a dealership with check in hand.

Your bank may be able to get you a better interest rate on your car loan than a dealership. In addition, many people find it convenient to have their loan at the same bank where they have their checking, savings, and other accounts.

The down-side to financing through a bank is that they can be unwilling to give a loan to someone with bad credit—and if they do, the interest rates can be high. Your bank may be less willing to give you a loan at all with bad credit, whereas a dealer might—and might charge you very high interests for the privilege. If you have credit that’s less than perfect, you might want to shop around.

Financing Through an Online Lender

In the past, most people were limited in their choices for an auto loan: either go through a dealer or go through a brick-and-mortar bank, usually the one you already have an account with. Today, you have a lot more choices than that. There are many online lenders out there—and it’s easy to get a quote from them.

Online lenders make it easy, first of all, to get several different car loan quotes from several places. Most have an online form you can fill out quickly at home, before you go to the dealership, and get quick or even immediate answers.

In addition, many online lenders offer lower rates than you’ll find at both your bank and  your lender. This is not always the case, but online lenders will often reduce your rates if you both apply online and agree to automatic loan payments.

If you have bad credit, it can also be easier to get a car loan—and a decent interest rate—through an online lender, especially one that has experience working with applicants who have less-than-perfect credit. Be wary of lenders who focus only on subprime loans, however, as these don’t always offer the best terms. The great thing about online car loans is that it’s easy to shop around.

Getting a car loan can be difficult, especially if you don’t have perfect credit. Know your options—you aren’t trapped working with a car dealership, and you often have a significant advantage if you walk in with a check in hand from a lender. Shop around—don’t feel stuck with your bank either—and look for the best interest rate and terms. With all the online lenders out there, you should be able to find a good deal.