Dealer Financing vs a Bank Loan for a Used Car

Get preapproved by a bank or credit union first, then let the dealer try to beat that rate, and always agree on the car's price before you talk about payments.

How Each One Works

With a bank or credit union loan, you apply directly with the lender. They tell you how much you can borrow and at what rate. You then shop for a car with that loan in hand.

With dealer financing, the dealer takes your application and sends it to one or more lenders. The lender offers a rate, and the dealer arranges the loan. You sign the loan papers at the dealership.

Both can work well. The difference is how much you can see and compare.

Get Preapproved First

A preapproval from your bank or credit union gives you a real rate before you walk in. It also tells you how much car you can afford.

With that number in hand, you can ask the dealer to beat it. If they can, great. If they cannot, you already have a loan ready. Either way, you are not stuck taking whatever is offered at the end of a long day.

Check how long the preapproval lasts and whether it has limits on the car's age or mileage.

It is worth asking more than one lender. Try your own bank and a local credit union, even one you do not belong to yet. Many credit unions make car loans and let new members join. Compare the offers on the same loan length so the numbers line up.

How a Rate Markup Works

When a dealer arranges your loan, the lender may approve you at one rate. The dealer can then offer you a higher rate and keep part of the difference. This is often called a dealer markup or dealer reserve.

This practice is legal in general, though limits can vary. It is also one reason a preapproval is so useful. If your bank offers you a lower rate, the dealer has a reason to match it.

Ask the dealer what rate the lender approved you for and which lender it is. You may not always get a clear answer, but the question shows you know how it works.

Focus on the Price, Not the Payment

One of the first questions at many lots is what monthly payment you want. It is better not to answer that at first.

A payment can be made to fit almost any budget by stretching the loan or adding a larger down payment. That can hide a high price, a high rate, or add ons you did not ask for.

Agree on the out the door price of the car first. Then talk about how to pay for it. Our guide to car dealer fees explains what goes into that price, and our guide on negotiating a used car price shows how to keep things separate.

Watch the Loan Term

A longer loan means a lower monthly payment, but you pay interest for more months. The total cost of the car goes up.

A long loan on a used car can also leave you owing more than the car is worth for a long time. That is a problem if the car is totaled or you want to sell it early.

Compare loans by the rate, the term, and the total amount you will pay over the life of the loan. The loan papers must show the annual percentage rate and the total finance charge. Read them before you sign.

Watch What Gets Added in the Finance Office

The finance office is where many extras are offered. Service contracts, gap coverage and other products can be added to the loan. Some may be useful to you. None should be added without you clearly agreeing.

Read the contract line by line. If you see a product you did not ask for, ask for it to come off. Our guide on extended car warranties covers what to read before you buy one. Reviews from past buyers often mention finance office surprises, and our dealer directory shows how past buyers rated each lot.

Check the Car Before You Borrow

A good loan on a bad car is still a bad deal. Before you sign loan papers, have the car checked. Our used car inspection covers 122 points, a full OBD-II scan, a road test, and tire and brake measurements, with photos of anything we find. We go to the car and the report comes the same day.

Common Questions

Get the Car Inspected