Financing through Dealership Is Convenient but Possibly Costly
The majority of car buyers opt to finance their vehicle, and the typical loan term now hovers around six years. Buyers who need to secure a loan to finance their car have different options; they can find their own financing through a bank or credit union or they can get approved for financing through dealerships.
While financing through dealerships can be convenient, the decision to get financed at the dealership could be more expensive. There are two ways to get financing through dealerships:
- Submitting a credit application to lenders from the dealership
- Receiving financing from the dealership (this is known as ‘buy here pay here’ financing)
Both of these options have benefits and downsides for buyers. Here’s what buyers need to consider when faced with the decision about whether or not to secure financing at dealerships.
Submitting a Credit Application to Lenders via the Dealership
Most dealerships offer car buyers the opportunity to find financing at the dealership. Car buyers will complete a credit application, and the dealership will submit it to different lenders. Buyers can sift through their options to find the financing with the best rates.
However, Experian explains that dealerships could tack on a higher rate than the lender offered. This higher rate then adds additional profit to the dealership. Buyers should know that the rate they see and the rate the lender offered could be different.
The difference between the lender rate and the rate from the dealership essentially serves as money for the dealership for their role in the financing. While not all dealerships bump up the rate, buyers should be cognizant that the practice does occur.
For some buyers, the convenience of having the dealership help with securing the loan could be a major benefit. Not all buyers are interested in going to different banks to find their lowest rate. Some buyers need a car immediately and have to secure the financing at the dealership.
Beyond convenience, the dealership also could offer lower interest rates for qualified buyers. Some dealerships offer 0 interest promotions for new models. These loans probably won’t be offered when buyers seek financing through banks, and the coveted 0 percent interest gives qualified buyers strong motivation to finance at the dealership.
‘Buy Here Pay Here’ Financing
Buy Here Pay Here (BHPH) financing is different from standard financing through dealerships. This type of financing doesn’t involve outside lenders. Instead, the dealership provides the financing for the vehicle.
BHPH financing could be an option for car buyers who have less than stellar credit. However, interest rates are likely to be higher than standard loan terms. CreditKarma explains that BHPH financing can only be used for cars at that dealership; these cars also could be more expensive.
Some BHPH dealerships install a device that will automatically disengage the starter if a payment is delinquent. Since financing is through the dealership, they may take steps to ensure that buyers don’t miss payments on the loan.
In addition, BHPH dealerships might not report the loan payments to credit bureaus. Depending on the buyer’s payment history this could be good or not so great. However, buyers who are considering BHPH financing can ask the dealership if payments are reported.
How to Find the Best Financing
There are benefits and downsides to financing through a dealership. Buyers who want to explore their options and take control of their loan choices can inquire about their options via their personal bank or other banks in their area.
However, before delving into credit applications buyers can better understand their credit worthiness by requesting their credit report. Consumers are entitled to one free report each year. This report helps consumers understand their credit score and find errors in their report that could be impacting that score, too.
The scores on a free credit report might not be the exact score that lenders see when they run an individual’s credit, but the score will help car buyers better understand their position when applying for a loan. For example, an individual with a credit score of 800 could qualify for much lower interest rates.
After reviewing their credit report, buyers can then research their financing options. Some buyers might opt to visit their personal bank to pursue a car loan.
Other buyers, though, might realize their credit score puts them in a difficult position for securing a loan. They might try to get approved at the dealership, or they might decide to purchase a car at a BHPH dealership.
Securing the Best Loan Rates
Interest rates are often dependent on a car buyer’s credit score. Those with a high score will be able to secure more favorable interest rates.
For buyers with low scores, rates might be higher. However, if these buyers could offer a down payment, they might be able to receive lower rates. Even if a down payment doesn’t bump the interest rate, it still helps the buyer reduce the impact of depreciation (especially for a new vehicle). Plus, buyers will pay less interest as the down payment lowers the price owed on the vehicle.
Sites that Let Buyers Compare Interest Rates
Buyers also could use sites that let them get pre-qualified for financing to better understand loan options. Getting prequalified is different from being approved for a loan. Pre-qualification is a soft credit inquiry; buyers typically only need to submit basic information like work history and home costs (mortgage or rent).
Sites like Carzing lets buyers get pre-qualified and see all their potential loan options. Buyers will be able to see a list of different lenders and loan options. They can review the terms of each loan including the interest rate and monthly payment. Carzing also helps buyers understand how much money they will need for a down payment.
Pre-qualification helps buyers gather information about their loan options, but this process is to be used as more of an informational resource. Buyers still need to visit a car dealership to get approved for the loan that they might want. This means that they will need to complete a credit application; they will need to submit more extensive information including their social security number.
Getting pre-qualified doesn’t guarantee that a car buyer can secure specific financing. Again, this is a soft credit inquiry. Only when a credit application is completed and more detailed information is submitted can buyers receive guaranteed loan options from lenders.
Determining the Best Financing Through Dealerships
Buyers who decide to complete a credit application at the dealership and sift through their offers from lenders might find that this is simply the easiest way to get financed. Buyers can ask the dealership about interest rates and they might even ask if the dealership bumps the rates for helping to secure the financing.
When shopping for a car loan, knowledge is power. Buyers should request their credit report and understand their creditworthiness so they know what interest rates for which they might qualify. Even if the credit score is low, buyers could still have options.
Working with a local bank could help consumers find a lower interest rate. However, sites like Carzing let buyers get pre-qualified for financing so they can evaluate all their loan options, review the interest rates and find the financing that works best for their budget.