What’s the first thing you think of when someone says “car loan”? Do you picture someone at a bank asking for a pre-approval? If you did, you’re in the majority. Most auto loans come from banks. But what about financing with a dealership, and is there a difference?
Dealer Financing vs. Direct Financing
Instead of heading to your bank and asking for a car loan, you can head to your local dealership and apply for financing with one of their auto lenders. Most dealers are signed up with third-party lenders or indirect lenders.
Banks and credit unions are direct lenders – you meet with them directly. Dealership financing relies on indirect lenders – you work with the finance manager who's the middleman between you and the lender. Dealers can have many different types of indirect lenders. Some are signed up with credit unions, others have captive lenders, and a few have subprime (bad credit) lenders.
The biggest difference between direct and indirect car loans is who you talk to during the financing process. Other differences include:
- Direct lenders can often offer lower interest rates because they tend to prefer borrowers with good credit. Credit unions may offer the lowest rates, in some cases, since they’re member-owned and can pass savings onto their clients.
- The captive lenders of automakers can offer rebates and 0% APRs to borrowers with qualifying credit scores. Some examples of captive lenders are Ford Motor Credit and GM Financial. If you have good credit, financing with a captive lender could save you money on a brand-new vehicle if you take advantage of rebates and special offers.
- Dealerships can have more bad credit financing options because some are signed up with subprime lenders – a.k.a. special financing. These lenders look at more than just your credit reports, and evaluate many parts of your financial situation to determine eligibility. Many of these dealers cater to borrowers with credit issues and those who want to improve their credit score with an auto loan.
- Some dealerships aren’t signed up with lenders at all, and instead use what’s called in-house financing. These are also referred to as buy here pay here (BHPH) used car lots, or tote the note dealers. They ask for a down payment, verify your income, and work from there. However, they may not report the auto loan, so credit repair may not be an option.
Which Type of Car Loan Should I Choose?
For borrowers with good credit, you probably can choose whichever financing method is most comfortable for you. Many good credit buyers choose to finance with their own financial institution since a borrower in good standing at their own bank or credit union is more likely to qualify for a loan there.
Additionally, direct lenders use pre-approvals, which allows you to shop like a cash buyer. The lender cuts you a check for your pre-approval amount, and you can head to any dealership you’d like. However, these can be hard to qualify for if your credit isn’t great.
With poor credit, financing with a dealer’s indirect lenders offers you the best shot at getting your hands on a car loan. Special finance dealerships signed up with subprime lenders often assist borrowers with credit challenges, such as bankruptcy, a past repossession, or situational or habitual bad credit. For many direct lenders, a poor credit score is reason enough for a denial, but subprime lenders look at the bigger picture.
Need Special Financing?
Special financing is for borrowers with credit issues. If you’re ready to get on the road to better credit while getting the vehicle you need, then consider a subprime loan. These loans are reported to the credit bureaus, so your timely payments improve your credit history. With a better credit score and some patience, you can increase your chances of qualifying for better loan rates and financing rebates in the future.
As we mentioned, not every dealership has special financing options. Those that do can be hard to pick out from the crowd. However, we’ve created a better way of finding a dealer that’s signed up with subprime lenders right here at The Car Connection.
With our vast network of special finance dealerships, we help bad credit borrowers get in touch with a dealer in their local area that can assist with bad credit. Get started right now by filling out our free, zero-obligation auto loan request form, and we’ll get right to work for you.