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 can apply on your terms. You can go to a bank or credit union that distributes auto loans and if you have a good history with the bank it may work to your advantage.
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.
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.
Both options have advantages. To sum it up, direct loans give you more flexibility, but you will have a harder time getting approved if you have less than great credit.
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