How to Buy a Car Through Dealer Financing

When purchasing a car, financing is a major factor to consider. While auto loans from traditional banks or credit unions are more common to consider, one alternative to explore is car dealer financing.

Car dealer financing is a type of auto loan provided by the dealer where you purchased the vehicle. There are two types: dealer-arranged and in-house. Unlike traditional auto loans, car dealer financing may come with add-on services such as maintenance packages or free or discounted warranties, but this varies depending on the dealer.

Before you apply for car dealer financing, take a deep dive into what it entails: what it is, its pros and cons, how to get it and your options.

Car dealer financing is a type of loan that you can get directly from the dealership where you intend to purchase a car.

There are two types: dealer-arranged and in-house — these differ in where the loan originates from, the qualification requirements and more.

In dealer-arranged financing, the dealer helps you secure funding by connecting you with third-party lenders. Dealers will typically have a network of lenders and try to partner you with one of them in exchange for a commission or other type of compensation.

Under dealer-arranged financing, the third-party lender is responsible for underwriting and servicing your loan. Your creditworthiness, such as your credit score, income, debt-to-income ratio and more, will be assessed, and you will be subject to the lender’s requirements.

Your dealer, on the other hand, will gather your information and submit an application on your behalf. Some dealers may also have established relationships with their network of lenders, which can allow them to negotiate a better interest rate or terms for you in order to keep your business.

The biggest benefit of dealer-arranged financing is convenience. You can apply for it on site, which can expedite the process of getting a car. However, dealers still need to make a profit — which means they may mark up your interest rate or use pressuring tactics to make you accept finance terms that are not in your best interest.

Generally, dealer-arranged financing is a good option for customers who value convenience over cost.

With in-house financing, the dealership is the lender. Also known as a “buy now, pay here” scheme, it’s typically offered by dealerships that do not have a network of lending institutions, such as small dealerships.

These dealerships will perform their own underwriting process before servicing your loan, which means the eligibility requirements may differ from traditional options. Some dealers, however, may be more willing to take on risk to keep your business. For instance, some dealerships may offer you a car loan even if you have bad credit. But it may be offset by a higher interest rate.

Similar to dealer-arranged financing, in-house financing is equally convenient. Since the dealership is the lender, you can choose your car and secure financing all at once, enabling you to avoid the hassle of finding a lender. However, one major disadvantage of in-house financing may be the requirements. Dealerships may require a higher down payment or have a higher credit score threshold for favorable rates.

Regardless, in-house financing is a viable option for those who want to purchase a car but value convenience or have difficulty getting financing from traditional lenders.

While car dealer financing can be convenient and has its advantages, it’s important to note both those advantages and drawbacks. This way, you can compare it against alternative financing methods.

Car dealer financing can be convenient for auto buyers, but it’s also important to explore other options. Looking at other options means you can choose what’s best for your financial situation.

Some other alternatives to consider include:

• Traditional Bank Financing: Many banks offer auto loans, which are special types of loans meant to purchase a car. It’s often applied for first, and upon approval, you use the funds to purchase the car. However, depending on the lender, you may need a good credit score to qualify.
• Credit Unions: Credit unions are nonprofit financial institutions that offer auto loans to their members. Typically, auto loans from credit unions can come with lower interest rates. Credit unions may also be more willing to work with customers with less-than-perfect credit. The catch, however, is that you’ll need to become a member of the credit union before you can apply.

A car is a big upfront expense, and determining the right way to finance your purchase can feel daunting. Should you apply for an auto loan via a traditional bank, opt for car dealer financing or explore alternate paths? Equipping yourself with some brief facts about car dealer financing will give you a good place to start.