If you are thinking about buying a car, you have probably wondered whether it is better to use dealer financing or finance through a credit union. With dealer-arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. Alternatively, with a credit union, you go directly to the credit union and apply for a loan. We refer to this type of loan as a “direct loan.”
Why Choose a Direct Auto Loan?
If you apply for a direct loan through a credit union, they may pre-approve you for a loan. This means they will quote you an interest rate, loan term (number of months), and a maximum loan amount. These figures will be based on several factors such as your credit score, terms of the transaction, type of vehicle and your debt-to-income ratio. You can then take the quote or a conditional commitment letter to the dealership.
A big benefit of being pre-approved is that the only item to negotiate with the dealer is the price of the vehicle and any other extras you want to include in the purchase.
How Dealer-Arranged Financing Works
In dealer-arranged financing the dealer collects information from you and forwards that information to one or more potential auto lenders. Each lender that receives your application will pull credit and decide whether to offer you financing by notifying the dealer of your approval. Please be sure to communicate with the dealer so you are aware of where and to how many lenders will receive your application. Dealers will most likely receive compensation from the lender for arranging the financing and in some cases the dealer is authorized to increase your auto loan rate in exchange for larger compensation from the lender.
Be sure to compare the financing offered through the dealership with the rate and terms of any pre-approval you received from a credit union, or other lender. Choose the option that best fits your budget.
Buying a car is a big decision, especially when it comes to your money. Be sure to examine the terms (payment, length and interest rate) of all offers.