It’s time for a new vehicle. You’ve been weighing up the pros and cons of whether you should lease or finance it. If you’ve decided that you want to own your new vehicle, this means financing the car if you cannot pay for the vehicle outright. So, you have a couple of options when procuring a car loan. So the question then becomes, are you better off financing your car loan through a bank or the dealership? We’re here to help you weigh your options.
Car Ownership
Car ownership gives you more freedom than leasing a vehicle from a dealership. For instance, owners can typically utilize any coverage they want without consulting with the car dealership. According to Kristine D’Arbelles, Senior Manager of Public Affairs for CAA, “A financial risk comes with owning a vehicle.”
Still, the main determining factors will be your lifestyle and money management. The main costs of owning a vehicle are:
It’s important to also take into account where you are driving. You will most likely be driving near your home, but you have to consider the commute to work and off-hours driving. Not all parts of the city are priced the same. The cost of fuel and parking can increase substantially in comparison to the suburbs. Understanding the prices of these factors both inside and outside your neighbourhood is important, as they will factor into your overall cost.
Financing Through a Bank vs. Dealership
Financing a vehicle means that you are asking someone else to buy the vehicle for you. You are essentially taking out a loan to pay for the full value of the entire vehicle. You will then pay off the entire car loan back to the bank, dealership, or credit union (plus interest) over a pre-determined amount of time. The terms of this car loan will be negotiated by both parties. When you finance a vehicle, you’re given the freedom to use the car at your convenience. Mileage is not an issue, as it is with leasing a vehicle. Additionally, borrowers who finance a vehicle don’t return their vehicle. Once it’s paid for, it’s yours to keep.
Pros of Financing Through the Bank
One of the pros of financing through a bank is that you can trust that your loan is secured from a legitimate source. You may already have an account with the same institution, like a mortgage, which can result in savings if you bundle your car and home insurance. Another pro can be found in the loan rate. Depending on your risk profile, your bank will likely give you a better rate than a dealer. In addition, you also have more purchase options available. With a loan secured, you should be able to buy new or used from anyone, whether it be a dealer, used car retailer, or private seller. Finally, borrowing from a bank means that you may also not need to make a down payment. You can typically get a loan with a longer term (often up to eight years) than what a dealer can offer.
Cons of Financing Through the Bank
However, a bank loan is not the right choice for everyone. One drawback is that going through a bank can make the car-buying process even longer. Pre-approval for a loan won’t guarantee you’re being able to drive off the lot with a car the same day. Banks also typically want to see a minimum credit score of 650 to 700. Quite often, people with lower credit scores receive higher interest rates, as a result. And in some cases, these same people are not approved for the loan at all. Banks also look into your income history as well as your debt-to-income ratio.
Keep in mind that banks are unlikely to provide you with a loan if you’ve recently filed for bankruptcy.
Pros of Financing Through a Dealership
Dealership financing has some advantages. One of the top-ranked pros is that you may be able to go into the dealership and drive off with a vehicle on the spot. Unlike with financing through the banks, if the inventory is available on the lot and the paperwork goes through, you will be behind the wheel much quicker. Another pro to dealership financing is that you will also have the option of getting a loan from:
- The manufacturer
- The bank the dealer uses
- An independent loan provider
Dealerships are usually more lenient when it comes to financing than banks. They are also less likely to scrutinize your credit score or income history. Additionally, another pro is that they may even want to sweeten the deal. To get your business, the dealer or manufacturer may offer you rebates or lower-cost financing.
Wondering if you can afford to buy a car? Review our article, “Buying a New Vehicle: What Can I Afford?” for some helpful tips.
Cons of Financing Through a Dealership
That being said, one of the biggest cons of applying for dealership financing is that it typically comes with higher interest rates than a bank. Your loan term (up to a maximum of five or six years) will likely be much lower than a bank, which means higher regular payments. If you are not flush with capital in the bank, another con may be that you should expect to make a down payment when taking out a loan from a dealership, as well.
Lastly, a dealership loan will limit the places where you can buy your car, as well as the cars that are available to you. For instance, you might not be able to get financing for all used vehicles from a dealer, and you will only be able to purchase a vehicle from that dealer’s inventory.
If you’re looking for advice on the best strategy when purchasing a vehicle, you can review our article, “5 Steps to Follow Before Buying a Car.”
So, should you choose a bank or dealership?
Each person’s financial situation is different. Depending on your financial history, credit score, and liquidity, the interest rate available to you is bound to be unique, whether it be from a bank or a dealer. What it will come down to is doing your due diligence. Make sure you find out what your financing options are and compare interest rates before settling on a car.
- If you have a good credit score and are looking for a longer term to pay your loan, consider going with a bank.
- If, on the other hand, you plan on paying off your loan as soon as possible, are okay with paying a down payment, and know where your car is coming from, you might opt for dealership financing instead.
Financing Your Car: The Bottom Line
Ultimately, there’s no one-size-fits-all answer. Whether you choose to finance your car through a bank or the dealership will depend on your financial situation and personal preferences. Consider what makes sense for you before signing, and make sure your auto insurance costs factor into your decision. Rates are higher or lower depending on where you live, your driving history, and the type of vehicle you drive, along with many other factors. Our isure representatives can advise you about the cost of car insurance based on the type of vehicle you are considering. They can run the numbers with you to help you understand what your total monthly costs for the vehicle and insurance will be.
Whether you choose to lease or finance, each has its Read more
