How Does Financing at a Car Dealership Work?

How Does Financing at a Car Dealership Work?

Perhaps you’ve found the car you want and it’s at a dealership. To help you with the car buying process, we’re explaining different types of lending and loan options, and what you need to bring with you to the dealership.

Types of Auto Financing Options

When you purchase a car from a dealership, there are quite a few lending options available to you – but they depend on your credit score and income. Here are the three biggest types of financing to be aware of:

  • Direct financing – This type of loan comes from a bank, credit union, or finance company. You apply for the loan directly with the institution, and if you’re approved, they write a check for the maximum amount you can borrow, which you take to pay the dealer for the vehicle. This type of loan is typically for those with good credit scores.
  • Dealership indirect financing – Simply put, you get financing at the dealership through their finance department. The dealer’s finance department typically sells the contract to a third-party finance company. Depending on the lenders they’re signed up with, the finance department approves those with good, and sometimes poor, credit scores. Bad credit loans through a dealership are called subprime financing.
  • In-house financing – A type of direct financing, and in this case, the dealer is also the lender. Buy here pay here lots are an example of in-house financing. Many of these dealerships don’t perform credit checks for car loan approvals. This lending type is usually only used by those with really bad credit who need a vehicle right away, or people in credit situations that have already been turned down for other types of financing, even subprime.

When you’re car shopping, you’re not just looking for the best price on the vehicle – you’re also looking for the best lender for you, and the best interest rate. Take your time and talk to different lenders to see which financing option can do the most for you. Each lender is different, and if you get rejected for financing by one, it doesn’t mean you’re out of luck.

Before You Go to the Car Dealership

The requirements for financing vary for each lender, but most have a similar process. To streamline your trip to the dealership and the interactions with your lender, listed below are the preparations to make so you aren’t rattled and left scrambling:

  • How Does Financing at a Car Dealership Work?Trading in an old car – If you still owe on your old car and you plan on trading it in, contact your current lender and request a 10-day payoff quote. Listed in the loan payoff will be 10 days of additional interest in addition to the current balance.
  • Talk to your car insurance agent – If you’re transferring car insurance, the price of your current auto insurance will probably change, based on the make and model of the new vehicle. Also, you may need an insurance binder, which provides proof of insurance until you receive a permanent coverage policy. The binder usually expires 30 days after its issuance. Remember, lenders require a financed car to have full coverage insurance.
  • Window shopping – Take time to browse vehicles online and in person. It helps to have an idea of what you’re looking for. If you have a car in mind, you can use online valuation tools to estimate the amount you may need to finance.
  • Prepare for additional fees – You won’t be paying just for the vehicle, there are other fees to consider. There’s a fee if you transfer a plate or buy a new license plate, a documentation fee, etc.
  • Down payment – Have your down payment prepared. Depending on your credit score, your lender may require at least $1,000 or 10% of the car’s selling price, whichever is lower. If you're trading in a vehicle and it has equity, it may cover part of (or all) of your down payment.

Once these preparations are done, you’re well on your way to creating a smooth car buying experience. To avoid going to the dealer and leaving empty-handed, there are only a few things left to gather up.

Things to Bring to the Dealership

With all your ducks in a row, you can gather up the rest of the documents you need when you arrive at the dealership. You may need additional items, depending on the type of financing you’re getting, but here are the basic requirements:

  • Driver’s license – It doubles as your form of ID, must be current and valid, and allows you to test drive any vehicle you’re considering. The address on your license must match the address you listed on your credit application.
  • Check stubs – If you’re planning on getting financing with any of the lending methods, you usually need proof of income. Lenders need to see gross (pre-tax) monthly income, proven with computer-generated check stubs, or tax returns, depending on your situation.
  • Trade-in title – Have the title to the car if you’re trading one in.

Depending on the type of financing you’re using, you may need more documents. If you’re planning on using subprime financing, along with the items listed above, additional documents may be required, such as:

  • Proof of a working phone
  • Proof of residency
  • A list of five to eight personal references
  • Down payment of at least 10% of the vehicle’s selling price or $1,000, usually whichever is less

Remember, a lender’s requirements are largely dependent on your credit score.

Need a Bad Credit Car Loan?

Being prepared for the trip to the dealer is half the battle. Make the most of your car shopping experience by staying organized to avoid the stress of purchasing your next vehicle. If you have bad credit and you’re having trouble getting approved with a traditional lender, we want to help.

Here at The Car Connection, we’re connected with dealerships around the country who work with subprime lenders for those with less than perfect credit scores. We want to help you find the financing you need! To get started and find a dealer near you with bad credit lending, simply fill out our free car loan request form, and we’ll get to work for you.


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Financing with The Car Connection

At The Car Connection, our goal is to remove the challenges of getting financed for a vehicle. Through technology, flexible financing options and exceptional customer service, we want to give you the power to control your car-buying experience.

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