Dealerships and Auto Loans

Rather than getting a car loan directly form a bank or credit union, many people choose to let the dealership handle getting the auto loan through a third party. This is known as dealership financing, and as with other car loan options, it has its advantages and drawbacks.

How Does Dealership Financing Work?

As opposed to direct lending where you obtain a car loan from a bank, credit union, or some other financial lender, dealership financing occurs when you get an auto loan from a financial lender associated with the car dealership.

When you choose dealership financing, the dealership shops your loan to the multiple financial lenders with which it has a relationship; once you and the dealership agree to go with a specific lender, a contract is written up outlining factors such as the:

  • Loan amount.
  • Auto loan term (or how long the loan will last).
  • Loan rates (or interest rates).
  • Any additional finance charges.

NOTE: Regardless of which route you choose, your financial lender becomes the lienholder of your vehicle. Technically, this means the lender is the true owner of your vehicle until you completely pay off the auto loan.

Buy Here Pay Here

In some cases such as buy here, pay here car dealerships, you get the loan from the dealership itself. Generally, these dealerships specialize in bad credit loans. Learn more about this process in our Buy Here, Pay Here page.

Pros & Cons of Dealership Loans


One-Stop Shopping

Perhaps the biggest advantage to obtaining auto loans from car dealerships is convenience. Not only do you find your dream vehicle, but also you finance it all in one setting.

You don't have to work with multiple banks or credit unions before finding the right auto loan for you; instead, you visit the dealership directly and a salesperson handles all the loan work for you.

NOTE: Dealerships have relationships with multiple auto loan lenders, so your odds of finding the perfect auto loan rates for your financial situation increase; however, understand that this is also a perk of working with direct lending, too.

Customer Incentives

Customer incentives are simple: they include perks such as zero-percent financing and cash-back rebates, and sometimes can help you better afford the car.

Often, dealership financing offers these types of customer incentives; direct lending does not. Typically these incentives are offered through captive finance companies—lenders owned by the makers of the car.

Keep in mind, these perks are usually reserved for those with excellent credit scores.


Less Competitive Rates

Although they have relationships with multiple lenders, dealerships can't always offer the kind of competitive auto loan rates that banks and credit unions can offer. This is especially true if you don't have the excellent credit required to qualify for certain dealership offers.

Sure, you might have to put in a little legwork to get these lower rates through a bank or credit union, but in the end, your finances might thank you for it.

Also, you might get lower rates or discounts with banks or credit unions with which you already have a relationship. For example, if you already have a checking and savings account or mortgage loan with one bank, that bank might be more willing to provide you with discounted auto loan rates. Dealership banks can't offer you these kinds of personal, established relationships.

Risk for Surprises

Sometimes, dealership financing leaves room for some unwelcome surprises. Perhaps the best example of this is finding out your credit score is less than ideal. Credit scores play a huge role in auto financing—especially when it comes to determining your interest rates.

Once you choose your vehicle and sit down with a salesperson to hash out your car loan terms and conditions, the salesperson will run your credit report. Unless you already know your credit score, you could find out—on the spot—that you aren't eligible for the auto loan rates you need. Unfortunately, this could put you back at square one.

On the flip side, direct lenders run your credit report before you've gotten excited about choosing your new car. So, after you get the best auto financing you can from a bank or credit union, you get to the car lot already knowing your auto loan interest rates.

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