Car dealerships often get a bad rap among individuals in the market for a new or used vehicle. There’s often a need to haggle with the salesperson regarding the final price, and an intimidating stack of paperwork that makes it hard to know if you’re getting the best deal.
One of the most common points of contention is the financing made available directly through the dealer. While dealership lenders may have a less than promising reputation, there are plenty of good companies they work with and some advantages to getting an auto loan through the dealer.
Let’s start with the benefits of financing your next car, truck, SUV, or other vehicle through a dealership.
Pros of Dealership Financing
1. You Can’t Beat the Convenience of Dealer Financing
Most people looking for a new or used vehicle to buy are drawn to the ease and convenience of financing through the dealership. If you’ve found the car you want at a price that meets your budget needs at a dealer, it is usually simple to apply for an auto loan at the same location.
Everything is completed at the dealership, including income verification, a credit check, and any transfer of money for a down payment. Instead of jumping from bank to bank to find the best deal, you can simply select and finance your vehicle at the one-stop-shop.
2. Availability of Higher Loan Amounts if Needed
Some dealerships also offer the advantage of financing the full amount of the vehicle being purchased, and possibly the expenses associated with transferring the title, paying taxes on the sale, and any other licensing needs depending on the state the vehicle is sold or registered in.
Each of these costs can be easily rolled into the new car loan and then paid down over time. While this makes the loan larger than it would be if you paid these additional expenses out of pocket, it is helpful in getting through the purchasing process without having to open your wallet for more cash.
3. Flexible Repayment Terms
In addition to higher financing amounts, dealership auto loans typically come with more flexibility than a loan through your bank or credit union. For instance, banks and credit unions often cap the number of months you can extend your loan term based on the amount of your loan or the age of the vehicle.
Dealership financing is less restrictive, providing loan terms of up to 84 months or more for well-qualified borrowers which makes your monthly minimum payments more manageable.
While some benefits exist with dealership financing for your vehicle purchase, there are caveats as well. Here are the top three disadvantages of financing an automobile through the dealer.
Cons of Dealership Financing
1. Potential for Higher Financing Cost
Although dealership financing for your new auto loan is convenient, it may end up costing you more in the long run. It is common practice that dealers offer auto loans with slightly higher interest rates than comparable credit union or bank loans.
Part of the reason behind the higher interest rate boils down to a commission paid to the dealer for establishing the relationship between the finance company and the borrower.
Even though the markup on the interest rate may seem small initially, even a percentage point difference can cost you hundreds to thousands over the life of your loan. You can use our auto loan calculator to estimate your monthly payments and test different scenarios.
2. Dealers and Their Lenders Aren’t Always Transparent
The loan agreement produced by a bank or credit union is relatively straightforward – it includes the total amount financed, the annual percentage rate (APR), and the monthly payment due. With dealership financing, things may not be so transparent.
Dealers and their lenders may add unnecessary items to your loan amount, such as an extended warranty or service packages. To ensure you’re not paying interest on these or other add-on items you might not want, pay close attention to your loan agreement, and ask for revisions if something isn’t sitting well with you.
3. Servicing Issues with the Auto Loan
With a major bank or credit union auto loan, whether from a national or local institution, it is fairly easy to get help with your loan should you need it. Dealership financing, on the other hand, means you’re accepting a loan from a third-party finance company you may have never heard of.
It can be difficult to know whether that third-party lender is credible or if they have a history of strong customer service. Especially when you’re in the middle of negotiating a vehicle purchase and want to get the deal closed.
Try to avoid finalizing the financing before you get all the necessary and pertinent information about your potential auto loan lender prior to signing on the dotted line.
Final Thoughts on Getting Auto Financing Through the Dealership
Securing your new vehicle financing through your selected dealership is not all doom and gloom. The process is simple and generally more convenient than a bank or credit union loan, and you can maximize your loan to include ancillary costs like tags, licensing, and taxes.
Unfortunately, some dealership financing deals end up costing you far more over the duration of your auto loan due to dealer markups through higher interest rates and items you might not want or need.
You may also be handcuffed to a less than reputable auto loan company with poor customer service and other negative issues. To make the most of your new auto loan, take the time to shop around first, and base your decision on more than just convenience.
