Introduction

Just over half of car buyers with auto loans obtain their financing in person at dealerships, according to a 2023 MarketWatch survey. While financing your car purchase at the dealership is convenient, you may get a better deal by finding your own auto loan at a credit union, bank, or other financial institution.

As with using dealer financing, finding your own auto loan to buy a car comes with its own unique set of pros and cons. Before you proceed, it’s essential to understand the benefits and downsides of obtaining your own financing to help you determine if this route may benefit you.

Pros of Finding Your Own Auto Loan

Securing your own financing can offer you numerous advantages, including the following:

Get Better Terms

While dealerships typically partner with a specific group of lenders, you may find more favorable annual percentage rates (APRs) and terms by shopping and comparing numerous lender offers on your own. Many financial institutions—especially credit unions—offer favorable rates to their members or existing account holders.

Avoid Dealer Markups

The interest rate you receive at a dealership may include a markup rate to compensate the dealer for arranging your financing. However, you can avoid this markup by securing your own financing directly with a financial institution.

Sidestep Additional Dealer Costs

When you have a preapproved loan amount in writing, it’s harder for the sales team at the dealership to push unnecessary features and options. In this way, having a loan preapproval for a specific amount empowers you to stick to your budget.

Boost Negotiating Leverage

Having a preapproved car loan is similar to being a “cash buyer” at the dealership. In other words, you negotiate based on the vehicle’s total “out-the-door” cost. This way, you can avoid a common dealership strategy to focus solely on the monthly payment amount because it often leads to extending the loan term to match the desired payment amount. Longer loan terms typically mean you’ll pay more in interest over the life of the loan.

Save Time at the Dealership

Most car buyers would rather not sit in a dealership financing room a minute longer than necessary. Unfortunately, the financing process can take several hours to complete. Arranging your finances ahead of time can help you save time and make your car-buying experience more straightforward.

Cons of Finding Your Own Auto Loan

While finding your own auto loan offers many advantages, there are also potential downsides to consider:

It’s More Work for You

Shopping and comparing car loans can take time, even if you can do most of the work online or by phone. And if you’re purchasing a used car, you may need to check to make sure the vehicle meets a lender’s qualifications for mileage, model year, and other criteria. If you don’t have the time or desire to secure your own auto loan, dealer financing may be a more convenient option.

Lower Rates Aren’t Guaranteed

While you can often secure a lower rate by comparing offers from traditional banks, credit unions, and online banks, it isn’t guaranteed. Sometimes, the dealer may be running a promotion with low or 0% financing to borrowers with excellent credit.

You May Encounter Stricter Credit Requirements

Banks and credit unions often have more stringent credit requirements for car loans than dealerships. Consequently, if your credit score is below average, you might not qualify for a new loan. Even if you do qualify, you might only receive favorable rates if your credit score is excellent.

You Could Miss Out on Dealer Incentives

Dealerships often provide incentives like cash rebates, low-interest financing, and special leases. These incentives can offer savings and benefits, but you might miss them if you secure financing elsewhere.

There May Be Potential Delays Without Specific Car Details

While many financial institutions may preapprove you for an auto loan based on your creditworthiness, some banks and credit unions require you to provide details about the car you wish to buy. If you haven’t decided on the vehicle you want to buy, a dealership may be more convenient and save you time, as you can select the car and finance it immediately afterward.

Tips for Affording a New Car Purchase

Buying a car requires a substantial financial commitment. As of December 2022, Cox Automotive, the parent company of Kelley Blue Book, reports the average new car costs over $49,500, while used cars average just over $27,000.

Save Up for a Sizable Down Payment

The higher the down payment you make on a car, the more you reduce the size of your auto loan. With less money to risk, your lender may offer more favorable terms on a car loan. If your credit falls in the fair or poor credit ranges, applying more cash upfront could help you secure a lower interest rate and reduce monthly payments.

Shore Up Your Credit

Generally, better credit scores lead to lower interest rates that save you money. For example, let’s say you’re financing a $30,000 vehicle with a 60-month new auto loan and have a credit score in the 500 to 589 range. According to August 2023 data using FICO’s loan savings calculator, you might pay a 17.384% interest rate and $15,107 in total interest charges. But by improving your credit score to fall in the 620 to 659 range, your interest rate could drop to 12.384%, with interest charges totaling $10,390, representing a $4,717 savings.

One of the most impactful actions you can take to improve your credit is to consistently pay your debts on time. Remember, your payment history makes up 35% of your FICO® Score☉, the score used by 90% of top lenders. Keeping your revolving debt balances low—or ideally paying them off—can also help since your credit utilization ratio makes up 30% of your score.

Consider Adding a Cosigner

If your credit isn’t ideal, adding a cosigner with good credit could help you get approved for a loan or receive a lower APR. Having a creditworthy cosigner, which usually requires a credit score of 670 or higher, can lower the loan risk in the eyes of the lender. Make sure your cosigner understands they are financially obligated to make the monthly loan payments if you fail to make them.

Comparison Shop for the Best Terms

It pays to shop different auto loan offers online to compare rates and terms side by side. If you find a great deal, you can go through the preapproval process before visiting the dealership, so you’ll have a formal loan offer in hand when negotiating with them. Generally, preapproved auto loan offers are good for 30 to 60 days, and you can always opt out if the dealer can beat your lender’s rate.

Know the Value of Your Trade-in

Trading in your current vehicle can significantly reduce the price of your new auto loan. Research your car’s value on sites like Kelley Blue Book and Edmunds to help ensure you negotiate a fair deal. However, understand that the sales and finance professionals at the dealership are trained and experienced negotiators, which may give them an advantage. As such, consider selling your car ahead of time for fair market value so there’s one less negotiating point to haggle over at the dealership.

Improve Your Credit Before Applying for an Auto Loan

If your credit is less than ideal, consider taking steps to improve your credit score before you apply for an auto loan. A higher score may help you qualify for lower interest rates and monthly payments. Check your credit report and credit score for free with Experian to get a clearer picture of your credit health. Monitoring your credit can help you track your progress and receive alerts when there’s a change to your credit report.