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How Does Financing a Car Through a Dealership Work?

Finance | 03/09/2023 11:13

When you are looking to buy a new car, you have two main options when it comes to financing. You can finance through the dealership where you are purchasing the car or you can finance the car separately from a bank or other lender. So how do these two options stack up?

Here’s how financing a car through a dealership works compared to financing a car through a bank.

How does financing through a bank work?


When you finance through a bank you will typically get preapproved before you go to buy your new car. Preapproval means that the lender has looked at your financial and personal information and determined that you are eligible for a car loan. And getting preapproved by a few different lenders can help you get the most competitive rates possible.


Getting preapproved is easy. In order to get started, you will need to research which lenders you would like to apply with. Consider any banks or credit unions where you already have relationships first, then look online and see where you may be able to get the best rates. When you apply for preapproval you will need the following information:

  • Your personal information. This will include your name, date of birth, and Social Security number.

  • Address and housing information. This will include how long you have lived at your current address and your mortgage or rental information.

  • Your income and employment information. This will include your annual income, employment status, and employer’s name.

  • Loan information. Since this is for a preapproval, this number will be approximate. You should have an idea though of how much you want to finance and how long you want your loan term to be.


Once you apply for preapproval lenders will pull a hard inquiry on your credit report. They will then determine if you qualify for a car loan and determine how much they are willing to loan you. When you have this information, you can bring it to a dealership and start looking seriously at a new car.


When you find a car that you like and that fits in your budget (and approved loan amount), you will have a bit of leverage at the dealership as you will be seen as a “cash buyer”. When you decide what car is right for you, you will contact the lender to give them the particular details of your loan (such as the actual total amount of the loan). Your car must meet certain criteria in order for the lenders to agree to finance your car. Typically the car must be less than ten years old and have less than 100,000 miles on it.


If the lender approves the final details of your loan, that’s pretty much it. You will sign some paperwork, the bank will send the money to the dealership, and you will start paying your loan to the bank. When you pay off your loan after x amount of time, the lender will sign the title over to you and the car will be yours.

How does financing through a dealership work?


Financing a new car through a dealership is pretty similar to financing a car through a bank, but there is one main difference. In this instance the dealership acts as an intermediary between you and the bank. 


When you go to purchase your car, you will go to the dealership and fill out the same information you would fill out when applying for a bank loan. The dealership then takes your information and submits it to multiple banks on your behalf. Dealers tend to mark up the rates that they receive, keeping the extra money as a fee for doing the work for you. They will then pass the information on for you to decide which loan is right for you.


In some instances dealers offer in-house financing. These financing offers cater to those with poor credit or no credit at all, and because of this they tend to have very high interest rates and fees. 

Is it better to finance through a dealership or a bank?


In general you will find better rates when you finance directly through a bank. This is simply because dealerships act as intermediaries, and all they really do is take some of your money in the transition. But depending on your situation, this might not always be the case.


Your best bet when it comes to financing is to get pre approved from a few banks or credit unions before you even set foot in a dealership. This will give you a leg up right from the start. Then, when you get to the dealership and select a car you can see if the dealer financing offers anything better.


Getting preapproved will help prove that you are a serious buyer as well. Having a set number that you are preapproved for will also help you to avoid addons. When the dealer starts trying to upsell you on this and that, you can simply say that you are not pre approved for any more than the stated amount. In general being preapproved will give you a stronger negotiating power and help keep you in the driver's seat.



How to prepare yourself for car loan financing.


Whether you finance your car through a bank or a dealer, you will need to make sure that your finances are in great shape ahead of time. Your credit score and credit report will be scrutinized by any lender that you apply with, so it’s a good idea to get them into top top shape before you start applying. Here are a few ways you can make sure your finances are in order before you apply for a lar loan:

  • Review your budget thoroughly to ensure that you can afford a monthly car payment (in addition to other transportation costs)

  • Pay down any high interest debts you may have.

  • Request higher limits on your accounts.

  • Make on time payments.

  • Request a copy of your credit report and review it for errors.

  • Resist opening new accounts in the time leading up to your application.

  • Save for a down payment. This will help you take out a smaller loan and can help reduce the interest rate you may be offered.


Preparing your financing can help you secure a better rate and better terms, so it’s important to take the time to do so.

That’s everything you need to know about financing a car through a dealership.

Financing a car through a dealership is not always the best idea, and will most likely not score you better terms. But it’s not impossible to get a better deal through a dealership, so you should keep an open mind, do some research, and see how the offers shake out. 


If you have already financed a new car, there’s a good chance you are overpaying every month. Contact Auto Approve to find out just how much you could be saving!


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