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Getting a new car is one of life's great pleasures. But the buying process, too often, is much less exciting. The stress of choosing the right car, negotiating a fair price and securing a favorable loan or lease can leech the fun right out of car shopping. Are you getting a good deal? Are you doing things the right way?
Among the many questions that may arise is whether you should finance your car through a bank or at the dealership: What are other carbuyers doing? According to Experian's State of the Automotive Finance Market for the second quarter (Q2) of 2020, consumer habits differ greatly depending on whether they're buying new or used. More than 61% of new car financing is done through the auto manufacturer or dealership in what's called a "captive" financing deal, but used car financing is dominated by banks, credit unions and financing companies, with just 9% of used car loans coming from captive financing companies.
Where Are People Financing Their Auto Loans?
Although banks, credit unions and outside finance companies accounted for more loans and leases overall in the Q2 2020 data, financing a new or used vehicle at the dealership is growing in popularity, reaching 31.1% last quarter. Just a year earlier, captive financing represented just 28.6% of car purchases and leases, versus 64.7% for banks, credit unions and finance companies—a roughly 11% increase in market share.
A closer look at new car financing may help to explain the trend. Among new car loans and leases, captive financing originating at the dealership dominated: 61.2% of new car loans and leases were made this way. Banks captured 23.9% of the market and credit unions only 10.2%. One reason might be strong incentives for financing at the dealership, including zero-percent financing or rebates.
The same kind of captive dealership-based financing—often backed by manufacturer-branded finance companies like Ford Credit or Toyota Financial Services—is not as dominant in the used car marketplace. Here, banks (34.8%) and credit unions (24.9%) financed a larger share of used car loans and leases than dealers did. But notably, "buy here, pay here" dealerships catering to buyers with bad credit (more on these later) represented a solid 13% of used car financing.
What's the Best Way to Finance a Car?
What can we learn from these trends? And, more to the point, where will you find the best financing—at the bank or the dealership? The answer begins with your buying preferences.
If you decide to finance your car through your bank or credit union, you can get preapproved before you go car shopping. That way, you know in advance how much car you can afford and you aren't wedded to a particular car company or dealership. You can test-drive as many vehicles at as many dealerships as you'd like. You can also negotiate your best price independent of financing. So, for example, a dealer won't be able to entice you into a more expensive car by offering a longer-term loan to lower the monthly payments. You decide in advance how you're financing and enter the dealership with your details set.
On the other hand, financing through a dealership is convenient. You don't have to engage your financial institution in advance or follow up for final approval once you've made your choice. A dealer may shop your application among many banks, credit unions and finance companies, which can result in a great competitive rate. They may, however, take a cut for their services, which can increase your interest rate slightly. In other cases, a dealer might connect you with financing from the car manufacturer's financing arm. To incentivize sales, a dealership may offer zero-percent loans, cash back or other enticements—many of which are sweet deals.
Of course, all financing opportunities are not created equal. Comparing rates, terms and incentives individually is critical. As usual, buyers with the best credit typically get the best offers. The company that handles your financing will check your credit score and report and will want to know your debt-to-income ratio to ensure you can afford your loan or lease.
How Your Credit Score Can Affect Where You Finance
Getting a loan or lease can be more challenging if you have fair or bad credit. A lower credit score can translate to higher interest rates, more fees and larger down payment requirements. It also leads some used car buyers to finance through "buy here, pay here" dealerships that specialize in in-house loans for people with poor credit. But buyers should be aware of potential pitfalls with this type of dealer financing. In addition to higher interest costs and fees, these loans may also come with a higher risk of repossession.
What's considered a good score for getting an auto loan? It depends on a variety of factors, including which credit scoring agency and scoring model your lender uses. Both FICO® and VantageScore® assign credit scores within a range of 300 to 850, but each has its own criteria for what constitutes fair, good or excellent credit. Additionally, the FICO® Auto Score provides a unique credit score based on your experience with auto financing. You likely won't know which scoring model your bank or dealership will use when evaluating your application, but you can get an idea of where your credit stands by checking your FICO® credit score and credit report before you begin applying for auto financing. You can get your credit report from all three major credit reporting agencies (Experian, TransUnion and Equifax) through AnnualCreditReport.com.
Whether your credit is stellar or needs a little help, you're likely to find financing options with either a financial institution or a dealer. If your credit score is 600, for example, you can choose from viable, if imperfect, financing options. For buyers with the credit to qualify, manufacturer financing promotions can be too good to pass up—although these promotions come and go seasonally. Also, buyers who qualify for the most attractive promotions can typically secure the most competitive rates from banks and credit unions as well. If you're unable to qualify for an auto loan on your own, you may delay your car purchase until your scores have improved or ask a trusted friend or relative with good credit to cosign a loan with you.
Knowledge Is Power
The best advice for prospective carbuyers (or lessees) is to do your homework. Before visiting any dealerships, check with your bank, credit union or an online lending platform to learn more about rates and preapproval requirements. Whether or not you choose to follow through with your financial institution, you'll have a baseline for comparison. Also research online for dealer and manufacturer promotions, so you know what financing incentives might be available. Finally, download your credit score and report. Knowing this information will give you some advance insight into the kinds of rates and terms that might be available to you.
Ultimately, the choice between financing at the bank or the dealership is a personal one. It may depend on what each party has to offer you at the moment you're buying. It may also come down to choosing which party you're more comfortable working with. Bank, credit union, finance company or dealership: Whichever one fits your buying style and makes you the most attractive offer is likely to be the best choice for you.