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Choosing the Right Lender: Dealerships, Banks, or Credit Unions?

Written By

CarOracle Experts

Published

May 28, 2023

Woman Contemplating on a Laptop
Woman Contemplating on a Laptop
Woman Contemplating on a Laptop
Woman Contemplating on a Laptop

Compare auto loan options from dealerships, banks, and credit unions. Find the right lender for you with our expert guide. Choose wisely for your next car purchase.

At a Glance

  • Dealership financing offers convenience, promotional offers, and the potential for easier approval.

  • Banks offer competitive rates, a variety of loan products, and the comfort of familiarity.

  • Credit Unions may provide lower rates (excluding OEM promotions), personalized service, and membership benefits.

Introduction

Introduction

Buying a car can be exciting, but understanding the best way to finance your purchase can be daunting. One of the key decisions you'll have to make is whether to secure financing through a dealership, a bank, or a credit union. Each has its advantages and potential drawbacks.

Dealership Financing

Many consumers opt for dealership financing because of its convenience. You choose your car, apply for credit, and drive off in your new vehicle all in one day. Dealerships often have relationships with multiple lenders, which may increase your chances of approval.

Additionally, dealerships, particularly those affiliated with car manufacturers (OEMs), sometimes offer promotional financing rates, especially on new vehicles. These special rates are typically not matched by banks or credit unions, so it’s worth investigating them when you’re considering buying a new vehicle.

However, these rates are usually only available to consumers with excellent credit. Moreover, one potential drawback of dealership financing is that dealerships may mark up interest rates offered by their lending partners. This means you could end up paying a higher interest rate than you would if you secured financing directly through a bank or credit union.

An additional point to note in dealership financing is the concept of "Buy Here Pay Here" (BHPH) dealers. BHPH dealerships are used car dealers that offer in-house financing, often with high interest rates. This type of dealership may be an option if you're struggling to secure financing through other avenues due to poor credit, but be aware of the potential high cost.

Bank Financing

Banks are a common choice for auto financing. They often offer competitive interest rates and a variety of loan options. If you already have a relationship with a bank, you may find comfort in using a lender you're familiar with. Plus, some banks offer discounts to existing customers.

However, approval and loan rates can depend heavily on your credit score. If you have poor or no credit, you might have a tougher time securing a loan from a bank.

Credit Union Financing

Credit unions operate similarly to banks, but they are not-for-profit organizations owned by their members. This means they may provide lower interest rates than banks and dealerships (excluding any special OEM promotions offered through dealerships). If you're a member of a credit union, you may also have access to other benefits like personalized service and financial education resources.

Like banks, credit unions base their loan approvals and rates on creditworthiness. Some credit unions may be willing to work with you if you have less-than-perfect credit, but this varies by institution.

Recommendations

Before embarking on your car buying journey, it's wise to have some understanding of the auto financing landscape. There's a wide array of loan offerings available, and it's in your best interest to leverage this competition to secure the best terms and rates for your situation.

As a potential car buyer, it can be greatly beneficial to arrange some financing in advance. This proactive approach will help you translate potential purchase prices into actual monthly payments, and give you a solid understanding of what you can realistically afford. This pre-approval can also speed up the buying process and give you an edge if you're planning to negotiate the price of the vehicle.

In addition, there are specific limitations to be aware of. For instance, many lending institutions have restrictions on extending loans for vehicles that are over ten model years old or have clocked more than 100,000 miles. Being aware of these constraints before you start looking can save you time and potential disappointment.

Securing the right auto loan can be as important as selecting the right vehicle. By understanding your options and planning ahead, you'll be well on your way to a smooth and successful car buying experience.

Conclusion

Ultimately, the best choice depends on your individual situation. It's a good idea to explore all options and gather quotes from a dealership, bank, and credit union before making a decision. Remember, when comparing offers, look at the total cost of the loan, not just the monthly payment.

Understanding the pros and cons of each type of lender will help you make an informed decision and potentially save you a significant amount of money over the life of your auto loan. Happy car shopping!

Auto Loans FAQs

What are the key terms and factors involved in an auto loan?

Principal: The principal is the amount of money that you borrow to purchase the vehicle. This is typically the cost of the vehicle minus any down payment or trade-in value.

Interest Rate: The interest rate is the percentage of the principal that the lender charges for borrowing their money. This is how lenders make a profit from giving out loans. Your credit score typically influences the interest rate that you are offered.

Annual Percentage Rate (APR): The APR is the total annual cost to you for the loan, expressed as a percentage. It includes the interest rate and any other fees or costs.

Loan Term: This is the length of time that you agree to pay back the loan. Common terms are 36, 48, 60, or 72 months (3-6 years). The longer the term, the lower the monthly payment, but the more you pay in interest over the life of the loan.

Down Payment: This is the amount of money that you pay upfront for the vehicle. A larger down payment can lower your monthly payments because it reduces the amount you need to borrow.

Monthly Payment: This is the amount you must pay each month until the loan is paid off. It includes a portion of the principal and the interest.

Prepayment Penalty: Some loans have a penalty if you pay off the loan before the end of the term. It's important to check if your loan has a prepayment penalty.

Total Cost: This is the total amount that you will pay over the life of the loan, including the principal, interest, and any fees.

Total Finance Charge: This is the total amount of interest and fees you will pay over the life of the loan as a result of borrowing money. It's determined by your interest rate and the length of your loan. The Truth in Lending Act requires lenders to disclose the total finance charge before you sign the loan agreement.

It's important to consider the total finance charge when comparing auto loans because it represents the real cost of borrowing. For example, a loan with a lower interest rate but a longer term could end up having a higher total finance charge than a loan with a higher rate but shorter term.

These are the basic terms and factors that you'll encounter in an auto loan agreement. Always read the fine print and make sure you understand all the terms and conditions before you sign. If there's anything you don't understand, ask the lender to explain it.

What are the key terms and factors involved in an auto loan?

Principal: The principal is the amount of money that you borrow to purchase the vehicle. This is typically the cost of the vehicle minus any down payment or trade-in value.

Interest Rate: The interest rate is the percentage of the principal that the lender charges for borrowing their money. This is how lenders make a profit from giving out loans. Your credit score typically influences the interest rate that you are offered.

Annual Percentage Rate (APR): The APR is the total annual cost to you for the loan, expressed as a percentage. It includes the interest rate and any other fees or costs.

Loan Term: This is the length of time that you agree to pay back the loan. Common terms are 36, 48, 60, or 72 months (3-6 years). The longer the term, the lower the monthly payment, but the more you pay in interest over the life of the loan.

Down Payment: This is the amount of money that you pay upfront for the vehicle. A larger down payment can lower your monthly payments because it reduces the amount you need to borrow.

Monthly Payment: This is the amount you must pay each month until the loan is paid off. It includes a portion of the principal and the interest.

Prepayment Penalty: Some loans have a penalty if you pay off the loan before the end of the term. It's important to check if your loan has a prepayment penalty.

Total Cost: This is the total amount that you will pay over the life of the loan, including the principal, interest, and any fees.

Total Finance Charge: This is the total amount of interest and fees you will pay over the life of the loan as a result of borrowing money. It's determined by your interest rate and the length of your loan. The Truth in Lending Act requires lenders to disclose the total finance charge before you sign the loan agreement.

It's important to consider the total finance charge when comparing auto loans because it represents the real cost of borrowing. For example, a loan with a lower interest rate but a longer term could end up having a higher total finance charge than a loan with a higher rate but shorter term.

These are the basic terms and factors that you'll encounter in an auto loan agreement. Always read the fine print and make sure you understand all the terms and conditions before you sign. If there's anything you don't understand, ask the lender to explain it.

What are the key terms and factors involved in an auto loan?

Principal: The principal is the amount of money that you borrow to purchase the vehicle. This is typically the cost of the vehicle minus any down payment or trade-in value.

Interest Rate: The interest rate is the percentage of the principal that the lender charges for borrowing their money. This is how lenders make a profit from giving out loans. Your credit score typically influences the interest rate that you are offered.

Annual Percentage Rate (APR): The APR is the total annual cost to you for the loan, expressed as a percentage. It includes the interest rate and any other fees or costs.

Loan Term: This is the length of time that you agree to pay back the loan. Common terms are 36, 48, 60, or 72 months (3-6 years). The longer the term, the lower the monthly payment, but the more you pay in interest over the life of the loan.

Down Payment: This is the amount of money that you pay upfront for the vehicle. A larger down payment can lower your monthly payments because it reduces the amount you need to borrow.

Monthly Payment: This is the amount you must pay each month until the loan is paid off. It includes a portion of the principal and the interest.

Prepayment Penalty: Some loans have a penalty if you pay off the loan before the end of the term. It's important to check if your loan has a prepayment penalty.

Total Cost: This is the total amount that you will pay over the life of the loan, including the principal, interest, and any fees.

Total Finance Charge: This is the total amount of interest and fees you will pay over the life of the loan as a result of borrowing money. It's determined by your interest rate and the length of your loan. The Truth in Lending Act requires lenders to disclose the total finance charge before you sign the loan agreement.

It's important to consider the total finance charge when comparing auto loans because it represents the real cost of borrowing. For example, a loan with a lower interest rate but a longer term could end up having a higher total finance charge than a loan with a higher rate but shorter term.

These are the basic terms and factors that you'll encounter in an auto loan agreement. Always read the fine print and make sure you understand all the terms and conditions before you sign. If there's anything you don't understand, ask the lender to explain it.

Is an auto lease the same thing as an auto loan?

An auto lease and an auto loan are two different methods of auto financing, but they are not the same thing. Here's a brief explanation:

Auto Lease: Leasing a vehicle is similar to renting. You make payments to use the vehicle over a specified period of time (typically 2-4 years). The lease agreement includes a set amount of mileage that you are allowed to drive during the lease term. If you exceed this mileage, you will have to pay additional charges per mile at the end of the lease.

The lease agreement also assumes normal wear and tear on the vehicle. If the vehicle has excessive damage beyond what is considered normal wear and tear, you could be responsible for the cost of these repairs.

One key point to remember is that your lease payments cover the vehicle's depreciation and the use of the vehicle for the predetermined amount of miles. This is why lease payments are typically lower than auto loan payments.

At the end of the lease term, you return the vehicle to the lessor. You then have the option to buy the vehicle, start a lease with a new vehicle, or end the lease agreement.

Auto Loan: An auto loan is a type of financing where a lender loans you the money to purchase the vehicle outright. You make monthly payments toward the principal amount of the loan plus interest. At the end of the loan term, often 3-6 years, you own the vehicle outright. Your monthly payments are typically higher than lease payments because you are paying for the entire value of the vehicle.

In summary, a lease is not an auto loan. They are two different financing methods with different terms and conditions. An auto lease allows you to use a vehicle for a predetermined period and mileage, while an auto loan allows you to eventually own the vehicle. The best choice between leasing and buying depends on your personal circumstances, including your financial situation, how much you drive, and how often you want a new vehicle.

Is an auto lease the same thing as an auto loan?

An auto lease and an auto loan are two different methods of auto financing, but they are not the same thing. Here's a brief explanation:

Auto Lease: Leasing a vehicle is similar to renting. You make payments to use the vehicle over a specified period of time (typically 2-4 years). The lease agreement includes a set amount of mileage that you are allowed to drive during the lease term. If you exceed this mileage, you will have to pay additional charges per mile at the end of the lease.

The lease agreement also assumes normal wear and tear on the vehicle. If the vehicle has excessive damage beyond what is considered normal wear and tear, you could be responsible for the cost of these repairs.

One key point to remember is that your lease payments cover the vehicle's depreciation and the use of the vehicle for the predetermined amount of miles. This is why lease payments are typically lower than auto loan payments.

At the end of the lease term, you return the vehicle to the lessor. You then have the option to buy the vehicle, start a lease with a new vehicle, or end the lease agreement.

Auto Loan: An auto loan is a type of financing where a lender loans you the money to purchase the vehicle outright. You make monthly payments toward the principal amount of the loan plus interest. At the end of the loan term, often 3-6 years, you own the vehicle outright. Your monthly payments are typically higher than lease payments because you are paying for the entire value of the vehicle.

In summary, a lease is not an auto loan. They are two different financing methods with different terms and conditions. An auto lease allows you to use a vehicle for a predetermined period and mileage, while an auto loan allows you to eventually own the vehicle. The best choice between leasing and buying depends on your personal circumstances, including your financial situation, how much you drive, and how often you want a new vehicle.

Is an auto lease the same thing as an auto loan?

An auto lease and an auto loan are two different methods of auto financing, but they are not the same thing. Here's a brief explanation:

Auto Lease: Leasing a vehicle is similar to renting. You make payments to use the vehicle over a specified period of time (typically 2-4 years). The lease agreement includes a set amount of mileage that you are allowed to drive during the lease term. If you exceed this mileage, you will have to pay additional charges per mile at the end of the lease.

The lease agreement also assumes normal wear and tear on the vehicle. If the vehicle has excessive damage beyond what is considered normal wear and tear, you could be responsible for the cost of these repairs.

One key point to remember is that your lease payments cover the vehicle's depreciation and the use of the vehicle for the predetermined amount of miles. This is why lease payments are typically lower than auto loan payments.

At the end of the lease term, you return the vehicle to the lessor. You then have the option to buy the vehicle, start a lease with a new vehicle, or end the lease agreement.

Auto Loan: An auto loan is a type of financing where a lender loans you the money to purchase the vehicle outright. You make monthly payments toward the principal amount of the loan plus interest. At the end of the loan term, often 3-6 years, you own the vehicle outright. Your monthly payments are typically higher than lease payments because you are paying for the entire value of the vehicle.

In summary, a lease is not an auto loan. They are two different financing methods with different terms and conditions. An auto lease allows you to use a vehicle for a predetermined period and mileage, while an auto loan allows you to eventually own the vehicle. The best choice between leasing and buying depends on your personal circumstances, including your financial situation, how much you drive, and how often you want a new vehicle.

What happens if I default on my auto loan?

Defaulting on an auto loan has serious implications, including a significant negative impact on your credit score. Here's what you can typically expect to happen if you stop making payments on your auto loan:

  1. Late Payment Reporting: If you're more than 30 days late on your car loan payment, your lender will likely report the late payment to the credit bureaus. This can cause a drop in your credit score, making it more difficult for you to get credit in the future.

  2. Communication from Lender: Your lender will typically reach out to you via mail, phone, or email to try to get you to make the missed payments.

  3. Default: If you continue to miss payments, your loan will go into default. The time it takes to default varies by lender and the specifics of your loan agreement. However, it often occurs after you've missed multiple payments over a period of 60-90 days.

  4. Repossession: If your auto loan goes into default, your car is at risk of repossession. The lender has the right to take back, or "repossess," the vehicle. The repossession process varies by state, and in some cases, lenders can take your car without notice. After repossession, the lender typically sells the vehicle to recover their money.

  5. Deficiency Debt: If the lender sells your car for less than you owed on the loan, you're responsible for the difference, called a deficiency debt. The lender can take legal action to collect this debt.

If you're struggling to make your auto loan payments, it's critical to take proactive steps. You may be able to refinance your loan, or your lender may be willing to negotiate a payment plan or loan modification. Always check your local state laws and regulations, or consider consulting a legal professional, to understand your rights and options.

What happens if I default on my auto loan?

Defaulting on an auto loan has serious implications, including a significant negative impact on your credit score. Here's what you can typically expect to happen if you stop making payments on your auto loan:

  1. Late Payment Reporting: If you're more than 30 days late on your car loan payment, your lender will likely report the late payment to the credit bureaus. This can cause a drop in your credit score, making it more difficult for you to get credit in the future.

  2. Communication from Lender: Your lender will typically reach out to you via mail, phone, or email to try to get you to make the missed payments.

  3. Default: If you continue to miss payments, your loan will go into default. The time it takes to default varies by lender and the specifics of your loan agreement. However, it often occurs after you've missed multiple payments over a period of 60-90 days.

  4. Repossession: If your auto loan goes into default, your car is at risk of repossession. The lender has the right to take back, or "repossess," the vehicle. The repossession process varies by state, and in some cases, lenders can take your car without notice. After repossession, the lender typically sells the vehicle to recover their money.

  5. Deficiency Debt: If the lender sells your car for less than you owed on the loan, you're responsible for the difference, called a deficiency debt. The lender can take legal action to collect this debt.

If you're struggling to make your auto loan payments, it's critical to take proactive steps. You may be able to refinance your loan, or your lender may be willing to negotiate a payment plan or loan modification. Always check your local state laws and regulations, or consider consulting a legal professional, to understand your rights and options.

What happens if I default on my auto loan?

Defaulting on an auto loan has serious implications, including a significant negative impact on your credit score. Here's what you can typically expect to happen if you stop making payments on your auto loan:

  1. Late Payment Reporting: If you're more than 30 days late on your car loan payment, your lender will likely report the late payment to the credit bureaus. This can cause a drop in your credit score, making it more difficult for you to get credit in the future.

  2. Communication from Lender: Your lender will typically reach out to you via mail, phone, or email to try to get you to make the missed payments.

  3. Default: If you continue to miss payments, your loan will go into default. The time it takes to default varies by lender and the specifics of your loan agreement. However, it often occurs after you've missed multiple payments over a period of 60-90 days.

  4. Repossession: If your auto loan goes into default, your car is at risk of repossession. The lender has the right to take back, or "repossess," the vehicle. The repossession process varies by state, and in some cases, lenders can take your car without notice. After repossession, the lender typically sells the vehicle to recover their money.

  5. Deficiency Debt: If the lender sells your car for less than you owed on the loan, you're responsible for the difference, called a deficiency debt. The lender can take legal action to collect this debt.

If you're struggling to make your auto loan payments, it's critical to take proactive steps. You may be able to refinance your loan, or your lender may be willing to negotiate a payment plan or loan modification. Always check your local state laws and regulations, or consider consulting a legal professional, to understand your rights and options.

What does it mean to refinance an auto loan, and when should I consider doing it

Refinancing an auto loan involves taking out a new loan to pay off your existing car loan. Usually, people refinance their auto loans to reduce their monthly payments, lower their interest rate, or change the term length of their loan.

The process of refinancing starts with shopping around for a new lender who can offer you a better deal than your current one. You'll apply for a new loan, and if approved, this new loan will be used to pay off your existing car loan. You'll then make your monthly payments to this new lender.

There are several reasons why you might consider refinancing your auto loan:

  1. Lower Interest Rates: If interest rates have fallen since you took out your original loan, or if your credit score has improved, refinancing could save you money on interest over the life of the loan.

  2. Affordability: If you're having trouble making your monthly payments, refinancing to a loan with a longer term can reduce your payments, although you might end up paying more in interest over time.

  3. Change of lender: You may be unhappy with your current lender's service and wish to change.

  4. Removing or adding a co-signer: Refinancing can allow you to remove a co-signer from your original loan, or add one to improve your interest rate.

Before refinancing, it's important to consider the potential costs. Some auto loans have prepayment penalties, meaning you'll be charged a fee for paying the loan off early. Also, extending the length of your loan can lower your monthly payments but could increase the total amount you pay in interest.

Lastly, it's worth noting that applying for refinancing can cause a small, temporary dip in your credit score due to the lender's credit check. So, it's a good idea to apply for refinancing only when you're ready.

As always, it's important to understand your local state laws and regulations governing auto loan refinancing. Always read the terms of any new loan agreement carefully and consider seeking advice from a financial advisor if needed.

What does it mean to refinance an auto loan, and when should I consider doing it

Refinancing an auto loan involves taking out a new loan to pay off your existing car loan. Usually, people refinance their auto loans to reduce their monthly payments, lower their interest rate, or change the term length of their loan.

The process of refinancing starts with shopping around for a new lender who can offer you a better deal than your current one. You'll apply for a new loan, and if approved, this new loan will be used to pay off your existing car loan. You'll then make your monthly payments to this new lender.

There are several reasons why you might consider refinancing your auto loan:

  1. Lower Interest Rates: If interest rates have fallen since you took out your original loan, or if your credit score has improved, refinancing could save you money on interest over the life of the loan.

  2. Affordability: If you're having trouble making your monthly payments, refinancing to a loan with a longer term can reduce your payments, although you might end up paying more in interest over time.

  3. Change of lender: You may be unhappy with your current lender's service and wish to change.

  4. Removing or adding a co-signer: Refinancing can allow you to remove a co-signer from your original loan, or add one to improve your interest rate.

Before refinancing, it's important to consider the potential costs. Some auto loans have prepayment penalties, meaning you'll be charged a fee for paying the loan off early. Also, extending the length of your loan can lower your monthly payments but could increase the total amount you pay in interest.

Lastly, it's worth noting that applying for refinancing can cause a small, temporary dip in your credit score due to the lender's credit check. So, it's a good idea to apply for refinancing only when you're ready.

As always, it's important to understand your local state laws and regulations governing auto loan refinancing. Always read the terms of any new loan agreement carefully and consider seeking advice from a financial advisor if needed.

What does it mean to refinance an auto loan, and when should I consider doing it

Refinancing an auto loan involves taking out a new loan to pay off your existing car loan. Usually, people refinance their auto loans to reduce their monthly payments, lower their interest rate, or change the term length of their loan.

The process of refinancing starts with shopping around for a new lender who can offer you a better deal than your current one. You'll apply for a new loan, and if approved, this new loan will be used to pay off your existing car loan. You'll then make your monthly payments to this new lender.

There are several reasons why you might consider refinancing your auto loan:

  1. Lower Interest Rates: If interest rates have fallen since you took out your original loan, or if your credit score has improved, refinancing could save you money on interest over the life of the loan.

  2. Affordability: If you're having trouble making your monthly payments, refinancing to a loan with a longer term can reduce your payments, although you might end up paying more in interest over time.

  3. Change of lender: You may be unhappy with your current lender's service and wish to change.

  4. Removing or adding a co-signer: Refinancing can allow you to remove a co-signer from your original loan, or add one to improve your interest rate.

Before refinancing, it's important to consider the potential costs. Some auto loans have prepayment penalties, meaning you'll be charged a fee for paying the loan off early. Also, extending the length of your loan can lower your monthly payments but could increase the total amount you pay in interest.

Lastly, it's worth noting that applying for refinancing can cause a small, temporary dip in your credit score due to the lender's credit check. So, it's a good idea to apply for refinancing only when you're ready.

As always, it's important to understand your local state laws and regulations governing auto loan refinancing. Always read the terms of any new loan agreement carefully and consider seeking advice from a financial advisor if needed.

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CarOracle is a California-licensed automotive dealer, License No: 43082, with an autobroker's endorsement, enabling us to represent consumers in the purchase or leasing of new and used vehicles.

©2024 CarOracle. All rights reserved

CarOracle Logo

CarOracle is a California-licensed automotive dealer, License No: 43082, with an autobroker's endorsement, enabling us to represent consumers in the purchase or leasing of new and used vehicles.

©2024 CarOracle. All rights reserved

CarOracle Logo

CarOracle is a California-licensed automotive dealer, License No: 43082, with an autobroker's endorsement, enabling us to represent consumers in the purchase or leasing of new and used vehicles.

©2024 CarOracle. All rights reserved