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There are pros and cons to financing your car purchase with dealer financing or with a bank or credit union loan. It’s important to understand the benefits and the process to determine which loan is truly best.

Dealership Financing

Dealership at times offer great financing deals but you have to be aware of the specific rules used to determine your interest rate, payment terms and conditions. Many people who are lured into a dealership because of 0% financing find they are not eligible for the promotion. Dealers can offer financing from the automakers financing arm or through partnerships with lenders. When a car salesman runs your credit report it’s shared with a number of partner lenders who will respond with a decision. You might never know how many of those lenders approved you as the dealer may only choose one to share. Be careful with the offers and don’t be pressured into a taking a loan. You want to make sure the lender is a reputable company with a solid track record. If you happen to have less than perfect credit, you might find the loan offers from unknown lenders offering high interest rates and fees. Some of these loans could include additional charges such as origination fees or penalties for early payoff.

Bank and Credit Union Financing

Banks and credit union financing may be more ideal for majority of people who have good to excellent credit. A key benefit of financing through a bank or credit union is that you can get pre-approved for a loan amount and use that approval to help you negotiate on a car purchase. You’re also not in the grasp of the car salesman who may get a commission for choosing to offer you one financing option over another. Additionally, banks and credit unions may offer lower interest rates with better terms saving you more money in the long-run. Financing your car directly with your bank or credit union is pretty hassle free and dealerships know how to handle these types of purchase transactions.

How to choose between dealership financing and bank/credit union loans

No matter which financing you choose, make sure you do your research and compare the offers. Do not feel pressured to take on a loan from a dealer and be okay to walk away from the deal if you feel uncomfortable. Know your credit report and credit score before applying for any car loan. This will help you determine what you’ll need to fix or improve to get the best rate and term possible. Get a pre-approval from your existing banking relationship, a credit union and another financial institution. If you are shopping for an auto loan from different lenders, credit scoring algorithms such as FICO will count multiple hard inquiries as one within a 30 day period. So you can feel assured you’re making the best decision before choosing a loan.

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