Getting a new car is one of life's great pleasures. However the buying process, all too often, far less exciting. The stress of selecting the right car, negotiating a fair price and securing a good loan or lease can leech the fun right out of car shopping. Are you currently getting a good deal? Are you doing things the right way?
Among the numerous questions that could arise is whether or not you should finance your vehicle through a bank or in the dealership: What are other carbuyers doing? According to Experian's State of the Automotive Finance Marketplace for the 2nd quarter (Q2) of 2022, consumer habits differ greatly depending on whether they're buying used or new. A lot more than 61% of new car financing is done through the auto manufacturer or dealership in what's called a “captive” financing deal, but used car financing is dominated by banks, lending institutions and financing companies, with only 9% of used car loans coming from captive financing companies.
Where Are People Financing Their Auto Loans?
Although banks, credit unions and out of doors finance companies taken into account more loans and leases overall in the Q2 2022 data, financing a brand new or used vehicle in the dealership keeps growing in popularity, reaching 31.1% last quarter. Just a year earlier, captive financing represented just 28.6% of car purchases and leases, versus 64.7% for banks, lending institutions and finance companies—a roughly 11% increase in share of the market.
A closer take a look at new car financing might help to explain the trend. Among new car loans and leases, captive financing originating in the dealership dominated: 61.2% of recent auto loans and leases were created by doing this. Banks captured 23.9% from the market and credit unions only 10.2%. One reason may be strong incentives for financing in the dealership, including zero-percent financing or rebates.
The same type of captive dealership-based financing—often backed by manufacturer-branded financial institutions like Ford Credit or Toyota Financial Services—isn't as dominant within the used car marketplace. Here, banks (34.8%) and credit unions (24.9%) financed a bigger share of used car loans and leases than dealers did. But notably, “buy here, pay here” dealerships catering to buyers with poor credit (more about these later) represented a good 13% of car or truck financing.
What's the Best Way to Finance a Car?
What are we able to learn from these trends? And, more to the point, which side you find the best financing—in the bank or the dealership? The solution begins with your buying preferences.
If you choose to finance your car using your bank or credit union, you can get preapproved prior to going car shopping. That way, you know ahead of time how much car you can afford and also you aren't wedded to particular car company or dealership. You are able to test-drive as many vehicles at as many dealerships as you'd like. You can also negotiate your best price separate from financing. So, for example, a dealer can't entice you right into a more expensive car by providing a longer-term loan to reduce the monthly payments. You choose in advance how you're financing and go into the dealership together with your details set.
On another hand, financing through a dealership works. You don't have to engage your lender ahead of time or follow-up for final approval once you've made your decision. A dealer may shop your application among many banks, credit unions and financial institutions, which can result in a great competitive rate. They may, however, take a cut for his or her services, which can increase your rate of interest slightly. In some cases, a dealer might connect you with financing in the car manufacturer's financing arm. To incentivize sales, an agreement offer zero-percent loans, cash return or any other enticements—many of which are sweet deals.
Of course, all financing opportunities aren't made the same. Comparing rates, terms and incentives individually is crucial. As usual, buyers with the best credit typically obtain the best offers. The organization that handles your financing will check your credit rating and report and will want to know your debt-to-income ratio to ensure you are able to afford your loan or lease.
How Your Credit Score Can Affect In which you Finance
Getting financing or lease can be tougher if you have fair or bad credit. A lesser credit score can translate to higher interest rates, higher cost and larger deposit requirements. Additionally, it leads some used car buyers to finance through “buy here, pay here” dealerships that specialize in in-house loans for those who have poor credit. But buyers should be aware of potential pitfalls with this type of dealer financing. Along with higher interest costs and fees, these loans could also come with a greater risk of repossession.
What's considered a good score to get a car loan? It depends on the number of factors, including which credit rating agency and scoring model your lender uses. Both FICO® and VantageScore® assign credit scores inside a range of 300 to 850, but each has its own criteria for which constitutes fair, good or excellent credit. Additionally, the FICO® Auto Score supplies a unique credit rating according to your experience with auto financing. You likely won't know which scoring model your bank or dealership uses when evaluating the application, however, you can get a concept of where your credit stands by checking your FICO® credit score and credit history before beginning applying for auto financing. You will get your credit score all three major credit rating agencies (Experian, TransUnion and Equifax) through AnnualCreditReport.com.
Whether your credit is stellar or needs a little help, you're likely to find financing options with either a lender or a dealer. In case your credit score is 600, for example, you are able to select from viable, if imperfect, financing options. For buyers using the credit to qualify, manufacturer financing promotions can be too best to pass up—although these promotions come and go seasonally. Also, clients who entitled to the most attractive promotions can typically secure probably the most competitive rates from banks and credit unions as well. If you are unable to be eligible for a a car loan by yourself, you may delay your car purchase until your scores have improved or ask a trusted friend or relative with higher credit to cosign a loan with you.
Knowledge Is Power
The best advice for prospective carbuyers (or lessees) is to research your options. Before visiting any dealerships, seek advice from your bank, credit union or an online lending platform to learn more about rates and preapproval requirements. Whether or not you decide to follow through with your lender, you will have a baseline to compare. Also research online for dealer and manufacturer promotions, so you know what financing incentives may be available. Finally, download your credit rating and report. Knowing this information will give you some advance understanding of the sorts of rates and terms that might be available to you.
Ultimately, the choice between financing in the bank or even the dealership is a personal one. It might depend on what each party has to offer right now you're buying. It may also get down to choosing which party you're more comfortable dealing with. Bank, credit union, finance company or dealership: Whichever one fits your buying style and enables you to the best looking offers are likely to be the best choice for you personally.