Where’s my Best Auto Loan: Bank or Dealership?
Few people can afford to pay cash for a car, even second-hand. This means joining the 84% of Canadians who are paying off their rides in instalments. When deciding on how to finance their second-largest lifetime purchases (after only their homes), smart buyers consider their loan options very carefully.
Depending on their personal situations, taking out a loan from a bank or a dealership could have very different financial consequences over the years ahead. Here’s a quick guide on the pros and cons of each option, and which one might be right for you.
Financing through a bank or credit union usually involves applying for a pre-approved loan. Once your application is accepted, the lender issues a letter of commitment that you can to the dealer, once you’ve found the vehicle of your choice. This is a great time saver, as the entire deal can be closed quickly.
- Upside: Having a specific amount approved as the loan may also discourage the salesperson from trying to convince you to add (usually expensive) extras that you might well not need.
- Downside: Some banks and credit unions establish age and mileage limits for second-hand vehicles.
Financing through a dealer takes a little longer, as you must fill out a credit application that is submitted to multiple possible lenders. Once the quotes are received, you compare the rates and terms, picking the option best suited to your needs.
- Upside: The dealer does all the work required to check your credit records, find a suitable lender, obtain competitive quotes, and prepare all the paperwork, leaving you free to focus on other things
- Downside: The dealer may negotiate a higher interest rate as a fee for handling your auto financing, particularly for used cars, which rarely offer promotional financing.
How Do I Choose the Best Auto Loan?
Going directly to a bank or credit union where you already have an account boosts your chances of a lower interest rate. Banks take your relationship with them into account when determining your eligibility and interest rate, as your credit record is already on their books, often stretching back many years. Their loan officers know exactly how much you are worth, and what level of risk you offer. This is why loyal account-holders can often find lower interest rates and friendlier terms with their banks.
Another advantage of taking out a loan from a bank or credit union is that you’re not tied to a single dealership, so you can still shop around for the best price on the vehicle of your choice. In contrast, dealers have no access to your financial records. Going only by your credit score, they must necessarily accept a higher possible risk for every buyer, meaning that their rates are far less competitive.
Sometimes the best vehicle financing that saves you the most money over the long term. Or is speed the most important factor, because you need wheels quickly? At other times, you might focus more on a low (or even no) deposit or trade-in. However, what most people look at is the monthly payment, making sure that it slots smoothly into their budgets. Only you can decide which factors are most important for you, when taking out an auto loan.