It’s common to hear people shopping for cars to get the best price but seldom on them shopping for loans to get the best auto rates. If you are borrowing money to buy a car, it’s more practical to shop for financing first. While you are doing some car loan shopping, you’d likely come across direct lending and dealer-arranged financing. Let’s examine what each option means and how each differs from the other.
Direct Lending: Loans Straight from the Lenders
When you approach a credit union, a bank or any financing company and apply for credit, you are going the direct loans route. The process is pretty much that of a standard loan.
1. Ask lenders for quotes on rates. This requires you do some legwork in finding lenders and comparing quotes. But with lending platforms available online, lenders are a click away. They can be found here.»
2. Get pre-approved for a car loan. This is when a lender runs a preliminary check on your income and credit score. If pre-approved, you’ll get a statement or letter from the lender confirming how much you can borrow (the pre-approved amount), as well as a quoted interest rate, and the loan term.
3. Shop for cars. You can show your pre-approved statement to the dealer or private party when shopping for cars. With a pre-approved amount, it’s easier to narrow down your choices.
Once you find the car that fits snugly with your expected loan amount, you can proceed to the next step of getting the actual loan for the car.
Dealership Financing: Loans Arranged by a Dealer
You are shopping for cars at the dealership and found a car you like. You approach the sales rep and ask if you can get financed. He/she says yes, we can arrange a loan for you. A dealer-arranged financing thus happens.
1. Select a car. You pick a car and submit an application and required documents to process your financing.
2. Secure financing. There are two common ways to get financed at the dealership. (A) The dealer arranges a loan on your behalf with a prospective lender. The lender may offer a quoted rate or buy rate on the loan.
After consummating the purchase contract where you agree to pay a certain amount every month, the dealer will sell the loan to the lender who now owns the loan and will collect payments from you.
(B) The dealer offers in-house financing. They often target those with poor or bad credit so the rates are usually higher than those charged by private lenders. The monthly payments go to the dealer who is the lender.
Which Car Financing Is for Me?
To decide which financing you want to take on while car loan shopping, let’s weigh each option based on:
It’s indeed more work to apply directly for a loan than ask someone, in this case the dealer, to get things done for you. But direct loans certainly put you in the driver’s seat, allowing you to compare and negotiate rates and other loan terms. You can still do some rate negotiation with the dealer only to the extent of what it offers you. A direct loan is closer to getting the best financing.
Pre-approval simplifies the process of shopping for cars, as you can only look at what you can afford and have a certain degree of certainty that you will likely qualify for the actual loan. When you shop for a car first, it’s easy to get lost and take out a loan at the dealer’s that is not exactly within your means.
Dealers do have an advantage when it comes to car deals. Some specific car loan deals are only offered through authorized dealers so the only way to secure one is through a dealer-arranged financing. These financing deals usually require a stellar credit record.
Think of it this way: you can try getting financing from a dealer but get pre-approved as well. This gives you more choices. And don’t settle for higher rates just because you have bad credit. There are lenders, if you put more effort in your car loan shopping, who may be able to give you a good rate.