The Best Way to Finance a Car

Is It Better to Finance a Car Through a Bank or Dealership?

The choice of how to finance your vehicle purchase is a personal one, but depending on the specifics of your situation, one option may stand out as better than the other.

Working directly with a bank, credit union or online lender to get preapproved for financing before you visit the dealership could save you money by giving you a chance to compare interest rates. Securing financing ahead of time also means you know how much your loan will cost and could save you from the dealership talking you into paying more.

Shopping around for an auto loan can be time-consuming, however, and doesn't necessarily guarantee a better rate—especially if you have great credit. Dealer-arranged financing can be more convenient and could even cost less.

Financing a Car Through a Bank

Bank financing involves applying for a car loan directly with a bank, credit union or online lender rather than using the auto dealer as a middleman. Using an online lending marketplace to compare offers from a variety of lenders is an easy way to search for bank financing.

Once you find an appealing loan offer, you can typically apply for the loan online or in person at a local branch and get preapproved before going to the dealership. Many lenders have networks of dealerships they work with and can tell you which dealers to visit and how to complete the purchase with your preapproved loan.

Pros and Cons of Financing a Car Through a Bank

Going through a bank on your own for an auto loan has advantages and disadvantages.

Pros

• May help you get the best terms: Dealers generally work with a limited set of lenders, who may not offer the ideal loan terms. In addition, dealers may add a markup to the annual percentage rate (APR) as compensation for arranging the loan. When you work directly with a bank, you won't have to worry about this.
• Can save you money on extras: If your loan amount is set before you visit the dealership, salespeople may be less likely to pitch expensive add-ons you don't need.
• Speeds up the sales process: Negotiating financing with a dealership is often the most time-consuming part of car shopping. Having financing already arranged can save you hours.

Cons

• Doesn't guarantee a lower rate: Shopping around yourself improves your chances of getting a low interest rate, but isn't a guarantee. If you have excellent credit, you might qualify for dealer promotions such as 0% APR.
• Could take longer: Some lenders won't preapprove an auto loan if you don't know which model you want, which slows down the purchasing process. Typically, you can walk into a dealership, find a car and immediately arrange financing through the dealer.
• Can restrict your options: Lenders sometimes require you to buy from a dealer in their network. This can limit your choices if the car you want isn't available from a dealer in the network.
• Requires time and effort: Shopping around for a car loan can be time-consuming. If you're buying a used car, you'll have to look up vehicle and eligibility requirements on your own. If saving time is a priority, shopping for a loan yourself might not make sense.

How to Finance a Car Through a Bank

The process for submitting an auto loan application varies depending on the lender, but here's how it usually works.

1. Prequalify with several lenders. Search for auto lenders online and go through the prequalification process if it's an option. Prequalification generally doesn't require a hard credit inquiry, so it won't damage your credit. Shopping around gives you a chance to compare interest rate quotes and other loan terms.
2. Choose a lender and apply. Select the best loan terms and submit a loan application. At this point, the lender may want details about the vehicle you plan to buy, as well as documentation of your income, address, identity and more.
3. Buy the car. Shop for a vehicle online or visit the dealership and tell them you've already arranged financing. Your lender will tell you how to complete the purchase.

Financing a Car Through a Dealership

When you buy a car, you may be offered different types of financing at the dealership.

• Dealer-arranged financing: This works much like bank financing, except the dealer acts as a middleman to find a lender for you. You decide which vehicle you want and fill out a credit application, which the dealer submits to multiple lenders. You'll then compare loan interest rates and terms to choose the best option.
• Captive financing: You might be offered a loan from the auto manufacturer's own financing company when you purchase a new or certified pre-owned vehicle. These financing companies often offer special deals such as 0% APR loans; however, your choices may be restricted to certain makes or models.
• Buy here, pay here (BHPH) financing is in-house financing offered by dealerships that specialize in buyers with poor or no credit. BHPH loans typically have high costs and down payment requirements, plus a higher likelihood of repossession.

Pros and Cons of Financing a Car Through a Dealership

There are upsides and downsides to financing a car through a dealership.

Pros

• Convenience: If you lack the time or energy to research car loans yourself, having the dealer handle the process can be easier.
• Greater flexibility: Rather than limiting yourself to dealerships within your lender's network, you can focus on finding the vehicle you want at the lowest price, no matter which dealer sells it.
• Potential for savings: If you have excellent credit, you may be able to get a lower interest rate from the dealership than from a bank. Some dealers offer promotional financing rates as low as 0% for qualified borrowers.
• More options if you have bad credit: Dealerships that specialize in working with borrowers with poor or no credit can offer financing you may not find at a bank.

Cons

• May be more expensive: Dealers sometimes negotiate a higher interest rate with you than the lender offers and keep the difference as compensation for arranging the financing.
• Less control: You can't choose the lenders the dealer sends your application to, giving you less control over the loan offers you receive.
• Not available for private-party transactions: You can't get dealer financing when buying a car from a private party.

How to Finance a Car Through a Dealership

Like banks, each dealer has its own approach to financing, but typically it works like this:

1. Visit the dealership. Select the vehicle you want to buy, negotiate the price and discuss potential add-ons, such as a service contract or maintenance plan.
2. Fill out a credit application. The dealer will have you complete a credit application, which they submit to the lenders they work with.
3. Select the best offer. When the dealer shows you your loan offers, choose the one with the best terms.

Prepare Yourself Financially Before Applying for an Auto Loan

Understanding how to get the best auto financing is important, but it's just as important to prepare yourself financially. Here's what to do.

• Review your credit report and credit score. You can check your Experian credit report and FICO^® Score^☉ for free. If you feel as though your credit isn't where you want it to be, you may choose to delay your car purchase temporarily and take the opportunity to improve your credit.
• Work to improve your credit score if necessary. Credit scores significantly impact how much you'll pay for an auto loan. According to Experian data for the third quarter (Q3) of 2024, buyers with excellent credit can get new car loans with an average APR of 5.05%, but buyers with very poor credit pay an average APR of 15.43%. Bringing any late payments current, paying bills on time and paying down credit card debt can help improve your credit. Avoid applying for new credit while shopping for a car since new credit applications can temporarily lower your credit score.
• Review your budget. Research the price of the car you want and make sure there's room in your budget for the monthly payment and related expenses, such as registration, maintenance and fuel. If not, you'll need to cut back elsewhere or choose a more affordable vehicle.
• Save for a down payment. Try to make a down payment of at least 20% on a new car and 10% on a used car. The bigger your down payment, the less money you'll need to borrow, and the less interest you'll pay over the life of the loan. A bigger down payment also reduces the risk that as your car depreciates in value, you'll end up owing more than it's worth.

As of Q3 of 2024, the average new car loan payment was $737 per month; the average used car loan payment was $520 per month. Using the VantageScore^® 4.0 credit scoring model, the average new car borrower had a credit score of 755, while the average used car borrower had a credit score of 694—both considered a good score.

Source: Experian data as of Q3 2024; VantageScore 4.0 credit score used

The Bottom Line

Whether to finance a car through a bank or an auto dealership depends on your priorities and preferences. If you have time to shop around, getting preapproved for a loan from a bank and then comparing those terms to the dealership's financing can ensure you know all the options.

As you prepare your credit to buy a car, consider signing up for Experian's free credit monitoring service. You'll get alerts to important changes in your credit usage and be able to track your FICO^® Score over time so there are no surprises when you apply for an auto loan.