Auto Loans: Choosing Between Direct Lending Dealership Financing

According to the U.S. Federal Trade Commission, average prices for a car purchase are now topping more than $31,000 for a new model vehicle and more than $17,000 for a used model. With a majority of American consumers unable to pay cash for a vehicle purchase, most buyers must take out an auto loan to cover at least part of the purchase price. For consumers utilizing credit, there are two financing options to choose from: direct lending and dealership financing.

With a direct loan, a buyer receives a loan directly from a financial institution, like a bank, local credit union or automobile finance company. Direct lending offers the ability to shop around for the best interest rates and get preapproved for an amount before even begin to search for vehicles at the dealership. This can be useful because it may help solidify your budget before you begin test-driving vehicles, ensuring you won’t fall in love with a car outside your price range.

Dealership financing is a second option for consumers to consider. In this financing arrangement, the buyer receives a loan directly from the dealer selling the vehicle. In this case, you’ll pay the principal amount owed and interest charges, just like in a direct lending arrangement, but it’s important to realize you’ll likely be subject to an additional dealership finance charge, too. This type of financing can be a convenient option for buyers, especially given dealerships’ long hours of operation and the ability to complete all the paperwork on-site in the dealer’s finance office. Occasionally, dealerships also offer special financing programs, like manufacturer incentives, that aren’t available to buyers through direct lending.

While it’s easy to get caught up in the excitement of a new vehicle, savvy consumers who comparison shop not just for a vehicle but for the loan terms, too, will likely reap financial rewards in the end.

Image via Flickr/danielphillips