It’s convenient to have a dealer handle financing for your car purchase, but if you locate your own lender and apply directly, you might be able to get a better interest rate.
You can choose to finance the purchase of an automobile through a bank or a dealership if you are purchasing one and lack the funds to pay for it in full. There are a few different factors that determine which option is best for you; however, not every car buyer will find that one option is better than the other.
Heres what to know about each option, so you can determine the best one for you.
The answer is: it depends Getting a car loan from a bank can be a straightforward process, but it also requires some preparation and planning Here’s a breakdown of what you need to know:
Factors that can affect your ability to get a car loan from a bank:
- Credit score: This is the most crucial factor. Banks typically prefer borrowers with good credit scores (generally above 660). A higher credit score means you’re considered a lower risk, leading to better interest rates and loan terms.
- Debt-to-income ratio (DTI): This measures how much of your income goes towards debt payments. A lower DTI (ideally below 36%) indicates you have more room in your budget for a car loan payment.
- Down payment: A larger down payment reduces the loan amount you need to borrow, making you a more attractive borrower.
- Employment history: Stable employment demonstrates your ability to repay the loan.
- Collateral: If you can offer collateral, such as another vehicle, it can increase your chances of approval.
Steps to increase your chances of getting a car loan from a bank:
- Check your credit score: Obtain your credit report from all three bureaus (Experian, Equifax, and TransUnion) and review it for any errors. Dispute any inaccuracies to improve your score.
- Improve your credit score: If your credit score needs work, take steps to improve it before applying for a loan. This could involve paying down debt, becoming an authorized user on a credit card with good standing, or disputing errors on your credit report.
- Calculate your DTI: Determine your monthly debt payments and divide them by your gross monthly income. Aim for a DTI below 36%.
- Save for a down payment: Aim for a down payment of at least 20% of the car’s value. This will reduce your loan amount and monthly payments.
- Gather documentation: Be prepared to provide documentation such as proof of income, employment history, and residence.
- Shop around for rates: Compare offers from multiple banks and credit unions to find the best interest rate and terms.
- Get pre-approved: Pre-approval from a bank shows the dealer you’re a serious buyer and can streamline the car-buying process.
Additional tips:
- Be honest and upfront about your financial situation.
- Ask questions and clarify any doubts you have.
- Don’t feel pressured to accept the first offer you receive.
Alternatives to bank loans:
- Dealership financing: Dealerships often have relationships with multiple lenders and can offer competitive rates. However, they may charge higher interest rates than banks.
- Credit unions: Credit unions typically offer lower interest rates than banks, but membership requirements may apply.
- Online lenders: Online lenders can be a convenient option, but they may have stricter eligibility requirements and higher interest rates.
Remember: Getting a car loan is a significant financial decision. Take your time, do your research, and choose the option that best suits your needs and budget.
Here are some additional resources that you may find helpful:
- Bank of America: https://bettermoneyhabits.bankofamerica.com/en/auto/car-loan-from-bank-vs-dealer
- Experian: https://www.experian.com/blogs/ask-experian/is-it-better-to-finance-a-car-through-a-bank-or-dealership/
- NerdWallet: https://www.nerdwallet.com/article/loans/auto-loans/how-to-get-a-car-loan
- Credit Karma: https://www.creditkarma.com/auto/i/how-to-get-a-car-loan
Financing a Car Through a Bank
Bank financing involves going directly to a bank or credit union to get a car loan. By doing this, you can avoid using the dealer as a middleman and obtain loan preapproval before visiting the dealership. Frequently, the lender will provide you with instructions on how to finish the purchase using the loan and will have a network of dealerships that you can shop from.
Depending on the bank or credit union, you can apply online or at a local branch. In some cases, you may need to provide information about the vehicle youre planning to buy.
Is It Better to Finance a Car Through a Bank or Dealership?
The method you choose to finance the purchase of your car is a personal decision, but based on the details of your case, one option might be more advantageous than the other.
Comparing interest rates by speaking directly with a bank before visiting the dealership may enable you to make even more financial savings. A dealer cannot raise the loan rate to make up for its involvement in the transaction if financing is secured in advance.
On the other hand, even if you have excellent credit, shopping around can take time and doesn’t always result in a better rate. These factors make dealer-arranged financing the choice thats typically more convenient.
How to Get a Car Loan (The Right Way)
FAQ
What credit score do I need to get a car loan from a bank?
Is it hard to get approved for a car loan?
Why would a bank not approve a car loan?
How does a bank decide to give you a car loan?
Can you get a car loan if you have bad credit?
If you have bad credit, you may find yourself at a less-reputable car lot, leaving you open to common auto loan scams like yo-yo financing. You don’t need to decide between bank and dealership financing right away. In fact, it’s beneficial to check your rates with a bank — and some online lenders — before you visit a dealership.
Should you use a bank to get a car loan?
While you can always take advantage of quick financing through a dealership, having an auto loan from a bank in hand will help you negotiate better terms. Even if you think you may use dealer financing, starting with preapproval from a bank helps you squeeze the most out of your auto loan.
How hard is it to get a car loan?
That means it’s currently harder to get auto financing than it’s been in the last two years. Proving the point, auto loan approval rates are down 2.4 percentage points year over year, the report noted. So not only are many consumers avoiding vehicle financing altogether, but more lenders are turning drivers down.
Which banks offer car loans if you have bad credit?
Some of the top-rated banks that offer car loans include: Capital One Auto Finance is a lender to consider if you have poor credit and may not qualify with other lenders. You can apply for prequalification without affecting your credit score, as this company offers estimated interest rates and loan terms without a hard credit check.