is it better to get a car loan from dealer or bank

Is It Better to Get a Car Loan from a Dealer or a Bank?

Buying a new car is an exciting experience. But for most people, purchasing a vehicle also means getting an auto loan. You essentially have two options for financing – go through the car dealership where you are buying the car or get pre-approved for a loan from a bank, credit union or online lender before you even step foot in the showroom. This leads many car shoppers to one key question – should I get my car loan from a dealer or a bank?

Even though financing through the dealership might seem easier, getting an auto loan from a third-party lender has some clear benefits. Once you know the good and bad points of each choice, you can choose the best place to get money for your specific situation and money requirements.

Pros of Getting a Car Loan from a Bank

Lower Interest Rates

One of the best things about getting a loan from a bank, credit union, or online lender is that the interest rate is likely to be lower. From what the National Credit Union Administration says, the average interest rate on a new car loan with 5 years was 6. 03% from a credit union compared to 7. 53% from a bank in December 2024.

When dealerships set up financing, they often raise the interest rate to make more money. Since banks lend you money, they don’t need to raise rates. Even a 1% difference on a $30,000 loan could save you more than $1,000 in interest over the life of the loan.

Ability to Shop Around

When you go the route of dealer financing, you are limited to the lending sources that particular dealership works with. But when you secure a pre-approval from a bank, you have the ability to shop around and compare rate offers from multiple banks and credit unions.

Online lenders like Lightstream and PenFed Credit Union are also options that may offer highly competitive interest rates depending on your credit profile, This gives you the power to find the most favorable loan terms before you ever step foot in the dealership,

Stronger Negotiating Position

Walking into a dealership with an auto loan pre-approval letter in hand puts you in a much stronger negotiating position than if you are relying on the dealer to arrange financing. The dealer will know that you already have financing locked in at a certain interest rate, so they will be more motivated to try to beat the rate you were offered if they want to capture the financing profit.

Because of the competition, you might save money on interest over the life of your loan. You don’t have to pay too much if the dealer can’t beat the rate. You have the pre-approval to fall back on.

Cons of Getting a Car Loan from a Bank

Slightly Longer Process

One downside of bank financing is that it requires you to go through a separate loan application and approval process before you start shopping for a car. This may add a few days or even weeks to the overall timeline. Many banks do offer quick online applications and fast decisions, but it still may be a bit less convenient than handling everything at once at the dealership.

May Have Stricter Credit Requirements

Since banks need to mitigate lending risk, their auto loan approval criteria tend to be stricter than dealerships. They will often require a minimum credit score of around 640 and stable income to qualify. If your credit is poor or your income is inconsistent, you may have an easier time getting approved through a dealership.

Dealership Financing Has Some Advantages

While bank loans clearly have some distinct benefits, there are situations where getting your financing directly from the selling dealership could be a better option.

Faster, One-Stop Process

The convenience of being able to choose a car, fill out loan paperwork, and drive off the lot in your new vehicle all in the same day is a major perk of dealership financing. It saves you the extra step of applying and getting approved with a bank beforehand. This simpler process may be preferred if you need a vehicle quickly.

More Lending Sources

Dealerships work with a network of third-party lending sources, including major banks, credit unions and specialized subprime lenders. This gives them an advantage in being able to shop financing options on your behalf and match you to a lender that will approve your application. More lending relationships mean more chances for approval.

Better for Poor Credit Borrowers

Specialty subprime lenders that most banks don’t work with directly are part of a dealership’s financing network. These lenders are accustomed to dealing with bad credit customers and may offer more reasonable rates than the dealer’s captive subprime program. This opens up financing options for poor credit car buyers who would likely get denied for a traditional bank auto loan.

Can Access Special Manufacturer Deals

If purchasing from a franchise dealer, you may be able to take advantage of special financing incentives being offered directly from the manufacturer through the dealership. For certain models, this could include deals like 0% APR for up to 72 months, which would be very difficult to find through a standard bank.

Weighing the Pros and Cons of Each Option

At the end of the day, whether it is better to get dealer financing or go through a bank largely depends on your individual situation. Here are some of the key factors to consider when deciding:

• If you have great credit (scores of 720+), banks are likely to offer lower rates.

• If you need a vehicle fast with minimum hassle, dealer financing has the edge.

• If you want negotiating leverage, pre-approval from a bank is preferable.

• If you have poor/fair credit or inconsistent income, a dealer may be more willing to work with you.

• If you find 0% APR or other special offers only through the dealer, those may outweigh a lower rate from a bank.

The best approach is to get pre-qualified with a few banks or credit unions to check available rates with a soft credit inquiry. If the rates look good, go ahead and formally apply for pre-approval with the lender offering the lowest rate. This locks in competitive financing before you start shopping so the dealer has motivation to beat the rate. However, also keep the option open to use dealer financing if they happen to offer a better incentive or rate. Having financing already in place just strengthens your position to negotiate the overall best auto loan terms.

The 20% Down Payment Auto Loan Strategy

An increasingly popular strategy used by savvy car shoppers who want to save money on interest and build equity faster is putting down 20% on their auto loan. With new car prices averaging close to $50,000 in 2025, that equates to around $10,000 down. Here are some of the benefits of making a larger down payment:

• Lower loan principal means reduced interest charges over the life of the loan.

• Paying off the loan faster helps limit depreciation risk.

• You have the option for a shorter loan term (3 years instead of 5 or 6) to save on total interest.

• In the event of a total loss, having 20% equity reduces the chance of being “upside down” on the loan.

Of course, not everyone can afford to put 20% or more as a down payment on a vehicle purchase. But if you have the available funds or can save up for a larger down payment over time, putting down around 20% on your next auto loan can lead to substantial interest savings and quicker equity build-up in your new car.

Tips for Getting the Best Car Loan Rates

Whether you choose to get financing from a bank or dealership, here are some tips to ensure you get the lowest rates and optimum loan terms:

• Check your credit reports and scores so you know where you stand with lenders. Gives you time to correct any issues.

• Shop around with multiple banks and credit unions to compare rate offers if going the pre-approval route.

• Ask about relationship discounts on rates if you have accounts with a bank.

• Look for lenders that offer autopay and electronic statement discounts.

• Calculate the monthly payments at different loan terms to find the optimal length for your budget.

• Be prepared to provide proof of income and make a sufficient down payment if possible.

Taking the time to find the best lender and loan program for your needs can potentially save you thousands of dollars in auto loan interest charges. Opting for a lower rate over a longer term just to get lower payments often ends up costing way more in interest in the long run.

The Bottom Line – Weigh Your Options Carefully

At the end of the day, determining where to get your car loan financing is an important decision that can impact your interest costs and the buying experience. For most buyers, going through a bank, credit union or online lender is likely to lead to lower rates and stronger negotiation position. But dealer financing provides simplicity and may make more sense depending on your credit profile and desire for quick and easy processing. Carefully weighing the pros and cons of each will help ensure you make the financing choice that best fits your auto loan needs.