Best Auto Loan Rates: Dealer or Third-Party Financing

Understand the pros and cons that come with Dealership or other third-party financing options!

Where Are the Best Auto Loan Rates?

Car loan research
Car loan research

When it comes time to shop for that next vehicle you may not know where to look for financing. There’s financing available direct from the dealership, in person at banks, through online resources, and credit unions. So that begs the question, which service is going to give you the best deal on your car loan? We’ve taken a look at the different car loan servicers and identified each of their advantages and disadvantages. See what we found and better prepare yourself for that next car purchase!

Dealership Financing

Discussing dealership options
Discussing dealership options

Dealership financing isn’t actually the dealership entity itself financing your car purchase, but they instead act as the middle man. It’s more “Dealer-arranged financing” as they’ll input your information into a system that relays to one or more lending services in order to get you approval. Those lenders send back to the dealer if they’ll approve you for the car loan and at what rate. The dealers take this rate and can actually offer you a higher rate than the lender quoted one. If you accept that marked up rate, the dealer gets that cut of the loan sent to them as compensation for setting up the connection to the lender. While that may sound a little underhanded, dealership financing does come with its benefits as well. We recommend this option if you’re looking at purchasing a brand-new vehicle as there are typically better incentives and discounts through the dealer.

Dealership Financing Pros

  • Car shopping and financing approval can all be handled in one place at one time for a quicker transaction.
  • Dealerships provide your information to one or more lenders to get approval and possibly the best rate.
  • Dealerships may offer better incentives for financing through them like an additional rebate, additional vehicle features or accessories at a discount, or a lower interest rate for a shorter loan period on a new car.
  • Typically pay online through approved lender.
  • Some dealerships allow you to get preapproval through them so you know what you’re approved for before shopping at their lot.
  • Can help your credit in the long run.
Signing paperwork for a new car
Signing paperwork for a new car

Dealership Financing Cons

  • Dealerships may present a higher interest for you than what the lender offered. That difference in the rate is then paid to the dealer as compensation for connecting and signing you with that lender at that higher rate.
  • You don’t necessarily get to choose the lender that is servicing your loan.
  • Typically, less incentives towards used car loans.
  • Have to pick car from the dealership’s inventory that you’re financing through.

Dealership Buy Here, Pay Here

Discussing car options with a client
Discussing car options with a client

“Buy Here, Pay Here” is where the dealership is the financing entity you’re working with. While these types of loans may sound enticing with the little or no money down and approval for low or no credit, it can actually be a harder situation than going through a bank or credit union. These “Buy Here, Pay Here” car loans can have significant markups to both the vehicles principal value and the interest rate at which the customer finances at. This type of car loan typically comes with a higher chance of repossession. This option should really only be a last resort if no other lender will get you approval and you’re in desperate need for a vehicle.

Buy Here, Pay Here Pros

  • Can get approved for a car purchase with low or even no credit.
  • Little or no money down.
  • Selecting the car, getting approval for the purchase, and the payments are all handled in-house at the dealership.
  • Quicker transaction since it’s all at the dealership.
Receiving new car keys
Receiving new car keys

Buy Here, Pay Here Cons

  • Interest rates are significantly higher than banks, credit unions, or other lenders.
  • May end up with a principal amount that’s thousands more that the vehicle’s actual value.
  • Buy here, pay here payments may not actually be reported to one or more major credit bureaus. If that’s happening, your credit won’t improve even if you are making on time payments.
  • Higher chance of repossession.
  • Have to pick from that dealership’s inventory only.
  • May not have customer service available at certain times of day or holidays to ask questions or pay loan directly.
  • Typically, have to pay at dealership location or within dealership network in-person or through the mail.
  • There isn’t always an option to pay online. When there is an online option, it sometimes comes with additional fees for paying that way.
  • Virtually no incentives in comparison to other options.

Bank Car Loan

Bank building
Bank building

There are plenty of banks out there available in-person or online that can finance your next car purchase for you. While you won’t get many of the dealer incentives if you go this route, you do get a straight forward quote upon approval. Banks are also nice for car loans since you can get preapproved for a specific amount and start shopping at multiple dealerships or even through private party sales. There are some drawbacks to financing through a bank, but with it comes a number of positives too. Going through a bank for a car loan is good if you’re looking to purchase a new or moderately used vehicle.

Bank Auto Loan Pros

  • You can get preapproved online or in-person at the bank
  • Having an established account with the bank can help get you approved.
  • You can choose which credit union is servicing your loan by going to that lender.
  • Once approved, you can shop at any dealership or even with a private seller.
  • The interest rate they offer is the true rate quote and not marked up.
  • Can pay online or at more than one location in person.
  • Can help your credit in the long run.
Couple in a meeting at a bank
Couple in a meeting at a bank

Bank Auto Loan Cons

  • May not know whether or not you are approved the same day.
  • Not many incentives available through financing with a bank.
  • May not approve the purchase of a vehicle based on their perceived value of it. Age, mileage, and vehicle history all play important factors in their decision.
  • Loan officers aren’t available at all times, so you may need to schedule a time with them to start the process.
  • Dealerships are less inclined to offer additional features or discounted accessories.

Credit Union Car Loan

Credit Union building
Credit Union building

Credit unions are similar to a bank, but they are more for the interests of the customers rather than profits for investors like a bank. Credit unions offer some of the lowest interest rates in comparison to other lenders and they’ll even drop those rates with unique incentives that relate to your car purchase or history with them. We recommend going through a credit union for a car loan if you’re looking at purchasing a new or moderately used vehicle, especially if you are looking at a car with good fuel economy or that’s electric as some may offer a rate discount.

Credit Union Auto Loan Pros

  • Provide some of the lowest interest rates in comparison to other lenders.
  • You can choose which credit union is servicing your loan by going to that lender.
  • You can get preapproved online or in-person at the bank
  • Better chance of approval if already a member of the credit union.
  • Better chance of approval even if you aren’t a member as they look at the individual rather than just your income, credit score, or job history.
  • Potential financing discounts based on account history with the credit union, purchasing a high fuel economy car, or going electric for your next car purchase.
  • The interest rate they offer is the true rate quote and not marked up.
  • Once approved, you can shop at any dealership or even with a private seller.
  • Can pay online or at more than one location in person.
  • Can help your credit in the long run.
Loan officer talking with customers
Loan officer talking with customers

Credit Union Auto Loan Cons

  • May not know whether or not you are approved the same day.
  • May not approve the purchase of a vehicle based on their perceived value of it. Age, mileage, and vehicle history all play important factors in their decision.
  • Loan officers aren’t available at all times, so you may need to schedule a time with them to start the process.
  • Dealerships are less inclined to offer additional features or discounted accessories.
  • Online payment methods may not be as high-quality in comparison to larger banks.

Shop Around and Find the Best Auto Loan Rate

Woman getting into her new car
Woman getting into her new car

Is there one true place to get the best car loan rate? Not really. They each come with their individual ups and downs, so you don’t want to limit yourself to one option. Best practice would be to shop different lenders by gathering quotes from different banks and credit unions. Asking for what their car loan rates estimates are currently won’t impact your credit, but applying for multiple loans over long periods of time can.

If you are going to have multiple lenders check your credit, try to keep the credit inquires all within a 15-day window. Keeping these inquires within that time can clump them together and be considered one credit inquiry rather than multiple, lessening the impact on your credit report. Once you’ve established your best rate, you can proceed with that car purchase knowing you’re getting the best deal available. Now all you have to do is see if you want that extended warranty or not.

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Jesse McGraw

Jesse McGraw brings his life-long car obsession into his writing. A fun childhood that involved growing up around race tracks, working on a rusty ‘99 Dodge Dakota held together by zip ties, and collecting Hot Wheels developed into a strong appreciation for automotive history. If there is an old, obscure, or rare car, he wants to know about it. With a bachelor's degree in Web Development & Design from Dakota State University, Jesse can talk shop about car or computer specs, focusing on classic cars, imports, and car culture.

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