Should I finance a car through a dealer or a bank? - Let's find out!

Comparing Bank Car Loans vs Dealer Financing

If you’re in the market for a new car, the first question is usually “what is my budget” and the second one is often “should I finance a car through a dealer or a bank?” And it makes sense. Purchasing a new or used car is a big decision with long-lasting financial and lifestyle impacts. So, you want to make sure you’re fully informed. We’ll help you understand the advantages and disadvantages of each type of finance in this 10-minute read. Oh, and make sure to check your credit score before you start any lending journey to save time and avoid disappointment.

What is car finance?

First, it’s important to know that car financing could refer to hire purchase (HP), personal contract purchase plans (PCP) and leasing contracts. You can take out a personal loan to finance a car, but that doesn’t mean you have a ‘car on finance’. Getting a personal loan from a bank is just that - a loan. And it’s not prescriptive of what you’re going to buy with it.

The Advantages of Financing Through a Bank

If you’re looking at getting a personal loan from the bank to pay for your car, there are some distinct benefits:

Cash buyer

When you go to the dealership with a personal loan, you have that cash in hand. And that means you won’t need to do any finance checks at the dealership. So, the whole process is faster.

Full ownership

When you purchase a car with a personal loan, you don’t have a credit agreement with the dealer. That means you could even sell it right away if you like. But you will need to pay the bank back regardless.

No limitations

Since you own the car outright, there won’t be any mileage limits or other restrictions on the vehicle. Want to change the paintwork? Fine. Move to Europe? Sure thing. There’s no fine print around your vehicle purchase.

The Disadvantages of Financing Through a Bank

When you finance through a bank it will almost always be more expensive per month. This is because you generally won’t put any money down against the loan and the interest rates are often higher. Plus, if you need to put collateral up against the loan, they will look to do this with something like your home. Remember, if you fail to make your loan payments, they could come for the collateral. So, that might make this a less popular choice for financing your car.

The Advantages of Dealership Financing

If you’re going to look to the dealer to help pay for your car, there are some unique benefits as well:

Generally cheaper

Car dealers and independent car finance firms offer very attractive rates for car buyers. Sometimes even 0% interest rates! This is because they can potentially make more money off of these agreements than just the purchase price. So, they have a lot of incentive to offer better terms than personal loans with a bank.

Lower payments

Unlike with a personal loan, you’re going to pay some money on the day to secure your vehicle. This means the principle of your finance agreement will be lower than with a loan from the bank. And the knock-on effect is less going out of your account each month on car finance payments.

Better deals

An often overlooked benefit of dealership financing is the relationship you build with the dealer. Most people come back to the same dealer once their agreement is up. And car dealerships look to reward that loyalty by offering good deals to repeat customers.

The Disadvantages of Dealership Financing

The main disadvantage of dealership financing is that you don’t own your car until it’s paid off. You can’t buy from a private seller. Nor can you modify the car. And you won’t be able to sell it until the finance agreement is resolved. If you don’t want these limits, then a bank loan is a better option. Lastly, if you don’t keep up your payments, your car can be repossessed.

Financing a Car With Bad Credit

You can still get finance with bad credit but it may be charged at a higher rate as there is greater risk and you might need to go to a specialist provider. But you’ll likely get a better deal with a dealership or independent car financer even with bad credit. This is because they can repossess the vehicle should you fail to keep up with payments. To keep the costs down when financing a car with bad credit, consider leaving a larger deposit or getting a guarantor to sign against the loan with you.

Getting Pre-approved for a Car Loan

You can get pre-approved from a bank, credit union or independent car finance lender or the dealership’s credit brokerage service can refer you. Pre-approval helps you know what you can spend before you shop. In order to get you pre-approved, they’ll need some information like your address, work history and the number of dependents. With a pre-approved car loan, you may even be able to negotiate for a lower out-the-door price. Just remember that getting the loan will still depend on the car’s age, loan-to-value ratio (LTV) and mileage.

Preparing to Finance a Vehicle

To get pre-approved for a car finance agreement or a bank loan, you’ll need a least 3 things:

• Driving licence & proof of your identity
• Proof of your income, like bank statements
• Proof of your address history

But you might also want to take a look at your monthly budget to account for expenses like fuel, repairs, insurance, parking and taxes. Once you find the car you like, you may need to provide more details like make, model, LTV, mileage and so on.

Making a Final Decision on Car Finance

When choosing between financing through a dealer or a bank, it’s ultimately a personal choice. You may find your local dealer offers you a very attractive deal with great service. Or, you might have excellent credit and benefit from very low personal loan interest rates. Maybe you drive all across the country and mileage limits won’t work for you. Or perhaps you don’t have a home to use as collateral for a secured personal loan. To make the decision easier, list out the pros and cons on paper (along with the costs) for your unique situation. Then just choose whatever benefits you the most.

If you want help or have more questions about how car financing works, read more here.