Choosing Between Direct Lending and Dealership Financing For Your Auto Loan

Direct vs Dealership Lending

Direct vs Dealership Lending. Which should you choose? The U.S. Federal Trade Commission indicates that typical car purchase prices have risen to about $31,000 for new models. This is also over $17,000 for used models. 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.

What is Direct Lending

There’s much to consider when wondering about Direct vs Dealership Lending. In a direct lending loan scenario, 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. Read on to learn more about direct vs dealership lending.

What is Dealership Financing

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. Like a direct loan, you’ll have to pay the principal and interest, but you’ll also have to pay a dealership finance fee. This sort of financing is handy for purchasers because they can complete all documentation 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.

It’s easy to get caught up in the excitement of a new car. Smart shoppers who compare loan terms as well as vehicle prices will certainly save money. Read on to learn more about direct vs dealership lending.

10 Tips for First Time Car Buyers

Whether you’re a new graduate looking for your first real job or someone who isn’t the conventional first-time car buyer, the car-buying process is never as stressful as it is the first time. But, no matter how much we love our high school hand-me-down or skateboard, it’s time to let go at some point. It’s not easy to be a good first-time automobile buyer, but if something is worth doing — and it is — it’s worth doing well.

To that end, we’ve compiled a list of pointers to assist you with the procedure. First, some background: Car purchases began at the same time that the first car was sold. Despite the fact that Karl Benz is credited with the development of the automobile, we have yet to locate a first-time buyer. However, we’re guessing Karl (under the heading “Karl’s First Cars”) dumped it on an unsuspecting first-timer, most likely a recent technical college grad with more short-term zeal than long-term perspective.

We’ve compiled this list as a Top Ten, a la Dave Letterman – if Letterman cared about what you drive, that is. (Dave has a small collection of thrilling automobiles, as well as a racing team…) Here are some pointers on what to buy, how to buy it, and where to buy it.

And, as explained in How to Buy a Car Online, you can do most of this from the comfort of your own home.

10. Create a budget that is realistic.

This value is usually calculated based on your monthly income. The ideal situation is to pay cash, but when considering a new (or merely newer) car, the nature of the transaction price frequently necessitates the use of financing. So, take a look at your overall cost of living, including housing, food, health insurance, and Happy Hour. After those have been estimated, the remaining funds could be used to pay for a car, petrol, insurance, and — in the case of cars without a warranty — technical maintenance.

9. Determine how much money you can spend on a monthly basis.

While this may appear to be the same as #10, your degree of debt is distinct from your monthly obligation. Neither one should be out of balance in contrast to your other assets if you’re a first-time buyer (at this point in your life those assets are probably limited to your most recent purchase at H&M). If you’re financing, figure $25 per thousand dollars borrowed over 48 months, and $20 per thousand dollars borrowed over 60 months. As a result, every $10,000 borrowed will cost $250 per month for four years and $200 per month for five years. Again, this is the minimum requirement; additional costs such as insurance, fuel, and routine maintenance are not included.

8. Determine your transportation requirements

We’re aware. Despite our warning, you have shown short-term enthusiasm UP TO THIS POINT. A MINI Convertible or a Fiat Cabriolet may be the car of the moment, but will it be practical for you on a day-to-day basis? You might assume you need a minivan or pickup for all of your belongings, but you can hire a pickup if you’re moving to a new apartment or, uh, moving home. Don’t buy anything you don’t need because of the high expense of petrol, insurance, and — in many cities — monthly parking. Also, consider renting what you require only when you require it.

7. Make a list of your desires and rank them in order of importance.

This goes against the preceding suggestion. The first purchase doesn’t have to be the be-all and end-all, but you should still keep an eye on your wish list because this isn’t a procedure that needs to be repeated every 18 months. It’s better to pay a little more for the features in a car that you want than to get slapped in the head — and wallet — with buyer’s remorse before you’ve even finished the first tank of gas. Spend the extra $40 a month to get what you want – and forgo a couple of Happy Hours in the process.

6. Do your homework (it’s never been simpler)

Online research is also obvious, as you’re reading this on one of the most popular websites for automobile buyers. There is an incredible quantity of information and viewpoint on new automobiles and late-model options available at this time. After you’ve digested everything, use your gut instincts — or the instincts of someone whose gut you trust — to balance it all out. Also, if you see someone driving a car you’re interested in and they’re not going 90 mph, pull over and inquire about their ownership experience. Read on to learn more about direct vs dealership lending.

5. Find a dealer who is convenient for you.

For the most part, buying a car for the first time (we’re looking at you, Karl) has been equivalent to getting a colonoscopy for the first time: come in, lay down, and you won’t feel a thing. Despite our natural apprehensions, the showroom salesman is closer to a normal person than you may believe. We’ve heard from credible sources that the majority of the unusual ones wind up selling something less valuable; let your parents worry about them. While new and late-model cars have never been more dependable, they still require maintenance, which should be simple to obtain. Compare dealer locations and, if all else is equal, showroom atmosphere while assessing a few options, such as the Mazda3, Kia Soul, and Honda Civic. We steer clear of dealerships where two-thirds of the sales staff are seated or standing at the front door.

4. Go for a test drive.

We believe that the value of the test drive has been diminished as a result of the abundance of online resources available for fundamental research. Nothing matters more in your decision-making process than how you feel behind the wheel. And there are so many factors to consider — seat height, wheel adjustment, steering feel, throttle tip-in, outward visibility, control arrangement, and so on — that you simply must drive the car for a considerable amount of time. And on someone’s idea of a stop-and-go test route, that duration should be longer than five minutes. Allow at least 30 minutes to practice stop-and-go, freeway merging, and freeway speeds. If your sales person — you know, the regular guy trying to make a living — doesn’t have the 30 minutes, locate someone who does, or look for another dealership.

3. Calculate the appropriate purchasing price

It’s time to come up with a purchase price once you’ve picked what you want — and you’ve already determined what you can afford. The Kelley Blue Book Fair Purchase Price provides an accurate estimate of what people in your region have paid for the car you’re interested in. A credit union should be able to offer you advice and may even have a contact on the showroom floor. A word of caution about referrals: Before scheduling a walkaround and demo with another salesperson, get the referral. The majority of these employees operate on commission, which is infamously low. Start with a reference if you intend to work with one. Finally, don’t give a “per month” figure when discussing how much you wish to spend; it’s the oldest trick in the book. If you think you’ll be able to spend $20K on a car that costs $25K, tell them that. You can always work your way up…but it’s much more difficult to go backwards.

2. Obtain funding or be aware of your choices

Financing concerns are similar to purchase price; the quantity of resources has increased at an exponential rate. However, your lack of credit history, or, in an increasing number of cases, minor credit history, mitigates this. The last thing you want is to be in a room with a F&I (Finance and Insurance) representative who has all the cards; the deck is stacked against you, if you will. It’s preferable to speak with your credit union, bank, or insurance provider ahead of time to arrange financing (many have the ability and willingness to finance your purchase). If the dealer option is competitive, go for it, but never treat it as if the dealer is the only money game in town. This is a vital step to take, so read our 5 Smart Steps to Financing Your Next Car for more information.

1. Take pleasure in the process

Even people with no interest or love in cars or trucks can be excited by the sheer range of alternatives available, as well as the actual innovation that goes into today’s automotive menu, provided the process is given a chance. With low financing rates and hundreds of wonderful cars to pick from, your options (especially in the “entry-level” category) have never been better — and car ownership has never been more gratifying. Take your time with the process, and you’ll be pleased with the results for the first 48 (or 60) monthly payments at the very least.

Image via Flickr/melisadotmuth