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.

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How Does Dealer Financing Work?

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.

Dealer-Arranged Financing

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.

In-House Financing

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.

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DEALER VS. BANK FINANCING: WHICH IS BETTER?

Both dealer-arranged and in-house car dealer financing offer ease and convenience to potential car buyers. It’s an excellent option for those who want to expedite the process of purchasing a car, as the dealership can either connect you with a lender and apply on your behalf or provide you with the loan entirely.

However, if you’re not in a rush and not after convenience, you can often get a better deal, one more suited to your specific financial circumstances, with an auto loan through a bank.

Pros and Cons of Dealer Financing

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.

Benefits of Dealer Financing

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STREAMLINED APPLICATION

Buying a car through dealer financing allows you to speed up the process of getting a car. Whether the dealership applies for a loan on your behalf with a third party or the dealership services your loan in-house, both avenues offer you more convenience.

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DISCOUNTS AND PROMOS

To push a sale, car dealerships may offer discounts on interest rates or have promotions, such as offering free maintenance or extended warranties.

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NEGOTIABLE TERMS

With dealer-arranged car financing, dealers will often have an established relationship with their network of lenders. In turn, dealers can negotiate terms on your behalf. Even with in-house financing, you may be able to negotiate your terms if it means you continue with the purchase.

Drawbacks of Dealer Financing

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FEWER LENDER OPTIONS

Since dealer-arranged financing relies on the dealer’s existing partnerships, it means working with a limited number of lenders. If your dealer only works with two lenders, you won’t have a lot of options.

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HIGH INTEREST

If your dealer connects you with a third-party lender, the dealership may mark up your interest rate to make a profit. If you opt for in-house financing, dealers can also charge higher interest due to the risk of servicing your loan.

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RISK OF HIDDEN MARKUPS

Dealers may not be transparent about all the fees involved, which could increase the cost of purchasing a car.

How to Get a Car Through Dealer Financing

Whether you’re a first-time car buyer or are looking at financing options for your third or fourth car, knowing the steps ahead of time can help you prepare and expedite the process. From visiting multiple dealers to reviewing different loan offers, each step allows you to carefully evaluate your options and find the best car and financing for your situation.

1
See multiple dealers

Visiting multiple dealers can help you find a car and offer that’s best for you. After researching what kind of car and features you want, take some time to test drive cars at each dealership. This way, you can be sure the one you settle on fits your needs.

2
Complete your application

Once you have narrowed down what car you want to buy, you will need to fill in your financing application. Some dealerships may have a pre-approval application you can complete, which can speed up the process. You may need to provide information such as your income, employment history and credit score.

3
Review loan offers

If you opt for dealer-arranged financing, your dealership should present you with your loan offers. If you opt for in-house financing, you should receive a single loan offer. Read the interest rate and other terms carefully, and compare your options to find the most favorable terms for your budget.

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Watch out for hidden fees

When reviewing your car dealer financing offers, it’s important to look for any hidden fees. This can include processing fees or documentation fees, which can quickly add up and increase the cost of your car.

5
Negotiate the loan terms

Whether in-house or dealer-arranged, you can negotiate your loan terms. Don’t sign right away, and don’t be afraid to try and get more favorable terms.

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Complete the paperwork and make your purchase

Once you’re happy with the loan terms and have negotiated any changes you want, it’s time to complete the paperwork and make the purchase. Be sure to read through all of the paperwork carefully to ensure that you understand the terms of the loan and any fees associated with the purchase.

Best Alternatives to Dealer Financing

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.

FAQs About Auto Dealer Financing

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.

How are direct lending and dealer financing similar?
Do dealers make money off financing?
Why do dealers prefer financing?
How long does dealer financing take?

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About Christopher Boston


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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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