Auto Loan: Financial Institutions vs. Dealership Financing


Planning to buy a new car but don’t have enough saved up for upfront payment? You can take two routes: take out a loan from a financial institution (bank or credit union) or get dealership financing.

But how do you decide which of these is the perfect fit for your financial situation and needs? We have gone ahead and listed down the advantages and disadvantages for each of these methods of financing to help you compare your options and make an informed decision:

Banks & Credit Unions: Pros

Existing relationships: If you decide to approach a bank or credit union with which you already have a relationship, chances are you may be able to get a better rate. A local bank or credit union may be more willing to work with those who have bad credit.

No middle man: When you borrow from the bank or credit union, you eliminate the middlemen and any extra fee.

Convenient: Bank and credit unions give you the option to apply for loans online, thus saving you a lot of time.

Banks & Credit Unions: Cons

Less room for negotiation: Banks and credit unions are less likely to welcome interest rate negotiations.

Lengthy and complicated: Getting a loan via a bank or credit union can be a long process compared to getting the whole package at a car dealership.

Car Dealership: Pros

Promotional pricing and discounts: Car dealerships may offer attractive promotional offers, like 0% APR on certain models, making them a cheaper option than credit unions or banks.

One-day shopping: Choosing a dealer means you can buy and finance your car from the same place. You can simply show up, and drive off with your new car. This is much more convenient compared to the lengthy loan processes at banks and credit unions.

Room to negotiate: Dealerships also are usually willing to negotiate the rates especially if you show up with a pre-approved loan offer from a financial institution. This will push the dealer to try and undercut the other offer with a lower rate.

Car Dealership: Cons

Higher rates: Since dealerships are essentially middlemen, they may try to make money off your loan by charging higher rates compared to credit unions and banks.

No personal relationship: Your dealer may put you at a disadvantage by approaching a bank with which you have no history. This means you lose the advantage of being able to negotiate for a lower rate.

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