Dealer financing or a car loan from a financial institution or bank can be confusing for any car buyer. The fundamental difference is that the dealer will offer you a lower credit rate because they have an existing relationship with the lending agency. On the other hand, going to the bank will mean going through all the hassle of meeting stringent requirements.
What is dealer financing?
Dealer financing is a particular type of loan aimed at car buyers with poor credit history. It means that you could be turned down by the bank but still get your car from the dealership. In this case, dealers will step in to offer you their form of financing that has an interest rate that is often relatively high. This option is usually available for buyers who have had previous defaults, bankruptcies, or repossessions.
Dealer financing can be suitable for people with a bad credit history. In contrast, bank car loans are aimed at low-income earners or first-time buyers. Banks will look to the person’s income applying for the loan before offering them finance. Banks will also insist on a down payment to offset the risk, which usually ranges from 20-30%.
What is a bank car loan?
For a bank, getting a new customer for a car loan usually requires the individual to have a good credit rating. Likewise, suppose you want to get dealer financing. In that case, your credit rating will play an essential part in determining the interest rate you should pay. However, a bank will generally have more stringent requirements.
For example, you might have to provide salary slips for the last three months or sign documents that would allow the bank access to your credit rating. The approval process could take anywhere from a few days to more than one month, depending on the financial institution’s requirements.
Which is better?
With a good credit rating and a credit history that includes no major defaults, you can save money on a bank car loan because of its low-interest rates. However, banks may foreclose on a loan if you default by making a late payment. In addition, it can be a very costly affair because banks usually charge an additional fee every month, especially if the payment is delayed or wrong.
On the other hand, going to a car dealership will put you in touch with dealers specializing in offering finance to people with bad credit histories like bankruptcies and repossessions. They will give you a much lower rate of interest because they have a deal with the lending agency. However, their rates are higher than bank loans. Therefore, it would be wise to settle for dealer financing only if your credit rating is so bad that other financial institutions have turned you down.
Dealer financing may have a lower interest rate, but there are some additional costs. For example, you will be charged an application fee every time you apply for finance.
According to Lantern by SoFi, “You’ll want to be aware of the cost of refinancing a car, taking into account any fees or prepayment penalties charged by your current lender.” If you’re looking to refinance a car loan with bad credit, give them a call.
