When you go to a dealership to buy a car via financing, you’ll need to apply for a loan. You can do this one of two ways, those being obtaining a direct loan from a bank or credit union, or you can use the dealership’s connections and have them arrange a loan for you.
That’s the difference between a direct loan and a dealer loan. That being said, there are some fundamentals to keep track of when considering a direct loan vs. a dealer loan.
Going for a direct loan ensures you are not going to be at the dealership’s mercy. You can go to a bank or credit union that distributes auto loans and if they know you so much the better.
It may make a difference as some lenders look at your account balances, deposit history and repayment behavior on previous loans you've held with them. While you may not have a membership with the credit union you approach, they will still give you a quote. Visit a few different lenders and see what kind of deals you can get.
Obtaining a loan through a dealer is bent on two fundamental reasons. Either your credit is too low to qualify you for a direct loan, or the dealership you’re looking at is offering a deal for financing.
This is called Captive Financing, which is only available at franchise dealerships that are 'subsidized' by the manufacturer to offer promotions like 0% financing.
Dealerships will often advertise financing for those with low or bad credit, so even if you don’t qualify for a direct loan from a bank or credit union, you can still get approved. Dealers that work with a network of lenders make money from new loans by adding a dealer mark up. These are the situations that often target lower credit tiers.
The smart money seems to say that a direct loan is the best way to go. It’s something you’ll have total control over from start to finish, and it’s negotiable in the sense that you aren’t bound to one lender, and can shop around for the best rates.
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