Should I Apply for a Car Loan at the Dealership?

If you’re preparing to buy a car, whether it’s new or used, you might wonder about the best way to apply for a car loan.

It’s an important thing to consider. In fact, one of the most common questions we get from our Addition Financial members is about applying for a car loan at the dealership.

In this post, we’ll talk about what the advantages and disadvantages are of getting a loan through a dealership. We’ll also tell you what you need to know before you apply for a car loan, so you can look out for your best interests and get the loan you need.

The Myth of One-Stop Shopping

Before we review the pros and cons of dealership loans, we want to make you aware of a common misconception about car shopping. Consumers sometimes make the mistake of thinking of buying a car as one transaction.

You must think of the purchase of your car and applying for a car loan as two separate things. Even if you do get a dealership loan, you should think of each transaction separately and make sure you’re getting a good deal at both ends.

It’s in the dealer’s best interest to get you to do everything through them. Remember that they have an incentive to convince you to apply for a car loan with them – and understand that their interests and yours may not align.

The Pros of Dealership Loans

While dealers may work hard to convince you to finance your automobile purchase through them, there are some advantages to doing so. Here are the pros of applying for a car loan through a dealership:

Dealership loans are convenient. Instead of making separate arrangements with a bank or credit union, you can do all your paperwork in the same place. For people who are pressed for time or don’t want to do the legwork of comparing rates, that can be a positive thing.
Another benefit of dealership loans is that they sometimes come with longer terms (and lower monthly payments) than bank loans. Many financial institutions won’t offer extended terms for a used car, but dealerships may offer up to 72 months to repay the loans they provide.
In addition to the loan terms, you may also be able to get a larger loan from a dealer than you would from a bank. For example, some dealerships will loan the full purchase price of the car plus enough to cover vehicle registration and other related expenses.

These three things might argue in favor of a dealership loan depending upon your circumstances.

The Cons of Dealership Loans

While there are some benefits to getting an auto loan through your dealership, there are some downsides to consider, as well. Here they are:

Interest rates at dealerships are often higher than auto loan rates at a bank or credit union. On paper, the difference might not seem like a big one. However, it’s important to calculate how much you’ll be paying in interest before you sign on the dotted line.
Dealing with a bank or credit union allows you to negotiate your loan with an institution you trust and have a relationship with. By contrast, a dealership loan will be negotiated with a financial institution that the dealership chooses, and you’ll have to put your trust in an organization you didn’t choose.
Another potential issue with dealership loans is transparency – or rather, the lack of it. It’s common for dealerships to add on costs and features that end up being hidden in your overall interest rate. That won’t happen if you negotiate directly with a bank.
Finally, there’s the issue of servicing your loan. If you apply for a car loan through your bank or credit union, you’ll be able to call them if you have a problem or question. Dealership loans are serviced through third-party lenders who may or may not provide the service you need.

As you can see, there are some downsides to applying for a loan through a car dealership.

Car Dealerships and Credit

The final thing we want to mention has to do with your credit score. Whether you decide to apply for a car loan through a dealership or through your financial institution, you should go into the negotiation knowing your score.

Dealerships will sometimes use scare tactics to make their customers think that they won’t be able to qualify for a traditional auto loan from a bank or credit union. They may exaggerate issues on your credit report and imply your credit is worse than it is.

For that reason, it’s essential to pull your credit report and know what your score is before you negotiate a car loan. That way, you won’t fall victim to any tactics designed to make you choose a dealership loan if you can get a better deal elsewhere.

Knowing the pros and cons of dealership and bank loans will ensure you make the best choice as you prepare to buy your next car.

To learn more about Addition Financial’s automobile loans or fill out an application, please click here.