Pros and Cons of Financing a Car Through a Dealership

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One of the most important decisions you’ll make during the car-buying process is how to finance your vehicle. Finance through the dealership or get an auto loan?

There are advantages and disadvantages to both. Here’s a guide to help you decide whether financing through a dealership is the right choice for you.

How Dealership Financing Works

When you buy a car, the dealership will usually offer a few financing options. Typically, you would fill out loan paperwork at the dealership when you purchase a vehicle and get approved on the same day.

The interest rates and loan terms you receive may depend on factors such as your credit score, income and the lenders the dealership is working with.

There are several types of financing offered through dealerships.

Dealer-Facilitated Financing

With this type of financing, the dealership arranges a loan for you through one of its partner lenders, usually a bank or credit union. After the dealer collects your financial information, such as your credit score and the overall loan amount needed, it sends out a request to these lenders. You can then compare the loan terms offered and select the one you prefer.

Manufacturer Financing

The auto manufacturer provides this type of loan through the company’s financing division. Often referred to as “captive lenders,” manufacturer loans exist to promote the brand’s car sales. They are frequently featured with special low interest rates on specific terms or car models. Examples of manufacturers’ lending arms include Toyota Financial Services and Ford Credit.

Did You Know?

More than 80% of new car buyers financed their purchase, according to Experian’s State of the Automotive Finance Market report in Q4 of 2024.

Buy Here, Pay Here Financing

This type of financing is generally targeted toward buyers with poor credit, and it usually comes with additional requirements and costs. These loans may have higher interest rates or require a larger down payment. Regular payments are made to the dealership, sometimes in more frequent intervals than the typical monthly installments.

Pros of Financing a Car Through a Dealership

Dealerships want to sell cars, and they try to remove as many obstacles as possible for the customer. That translates to some potential benefits for the buyer. 

Convenience

Many car buyers simply don’t have the time or desire to apply for loans at multiple banks and then compare those rates and terms. Dealerships make this process easy by handling the paperwork and quickly getting loan rates and approvals. This streamlined process typically gets you in and out with your new vehicle on the same day.

Special Promotions and Incentives

Dealerships and manufacturers often run special interest rates or term deals to stimulate sales of a particular vehicle or to create more manageable monthly payments. For example, manufacturers sometimes advertise a 0% annual percentage rate or an amount of cash back on a specific model for a stated term. If that’s the vehicle you’ve got your eye on, it may be wise to take advantage of that deal.

Access to Multiple Lenders

Dealerships typically have a list of lenders they work with, so you may be able to choose between several options to find the best term and rate for you.

Potential for Better Loan Terms

A dealer may be able to negotiate and get you a better term or interest rate on your car loan, especially if you have a high credit score or if you’re committing to a sizable down payment.

Cons of Financing a Car Through a Dealership

While getting a loan through a car dealership can be convenient, you should be aware of these potential downsides.

Higher Interest Rates

Some dealerships will mark up their rates to make a profit. If you don’t have preapproval from an outside bank or credit union for a certain loan rate, it can be difficult to negotiate on the dealership’s rate.

Pressure To Buy Add-Ons

Dealerships sometimes bundle loans with other extras, such as extended warranties or added features. If this is the case, you can easily end up paying more than you intended to. Even if you ultimately get them to drop the add-ons, the high-pressure sales tactics will probably cancel out any convenience benefits you thought you were getting by financing at the dealership.

Limited Negotiation on Interest Rates

Many dealerships have set rates that aren’t as flexible as you might find if you shopped around at several banks, credit unions and online lenders.

Risk of Longer Loan Terms

“What would you like your monthly payment to be?” Watch out for this. Sales advisors will often ask this question to distract you from the overall price of the car, or the total cost in principal and interest. When you answer, they’ll adjust the loan terms to lower your monthly payment. The problem is, this often leaves you with a longer loan term of 72 months or more and more interest owed.

Comparison: Dealership Financing vs. Bank or Credit Union Loans

When Dealership Financing Might Be a Good Option

There are several situations where getting your vehicle loan through the dealership can be a good choice.

There’s a promotional deal on the vehicle you want: If a manufacturer is advertising a special rate or cashback offer on the vehicle you’ve had your eye on, financing through the dealership can lead to significant savings. If you’re flexible on the car you want, research the current promotional offers from various manufacturers.

You need fast approval: Applying for car loans through banks or credit unions often means time-consuming paperwork and longer waits for approval decisions. If you need (or want) a vehicle immediately, you may have to finance it through the dealership, which can usually get you approved the same day.

You prioritize convenience: Sometimes you just don’t want to go through the hassle of applying for loans at multiple banks and then comparing rates and terms. Car dealerships have a streamlined financing process that removes much of the effort and paperwork on your end.

You have poor credit: If you have poor or no credit, your only option may be to get a “buy here, pay here” loan from a dealership. This likely will mean less appealing terms.

When You Should Avoid Dealership Financing

While dealership financing can be a good choice for some buyers, it may not be right for others. Avoid financing at the dealership if you fall into these categories.

You qualify for a better rate at a bank or credit union: If you’ve been preapproved by a bank or credit union for a generous auto loan rate, you may still want to ask the dealership whether they can beat it. A preapproval can be a strong negotiating tool. However, if the dealer can’t beat it, you’re better off going with the outside loan.

The dealer is offering long loan terms with high interest: If the dealer is trying to lower your payments by lengthening the loan, you may want to delay your purchase and check with several outside lenders to see if you can get a more appealing rate or loan length term.

The dealer is pushing extra add-ons or features: Similar to the above situation, this is also a case where it may pay off to hold off on your purchase and shop rates at outside institutions.

Final Thoughts: Is Dealership Financing Right for You?

Getting an auto loan through a dealership can be a good option for some buyers. Much of the decision comes down to your financial situation, goals and priorities. Preparing in advance before you enter the dealership can pay off.

You may want to get preapproval from a bank or credit union so you have a loan term and rate to compare to what the dealer is offering. You may also want to research what special financing deals are being offered by manufacturers. 

By taking these steps, you’ll be better equipped to make an informed decision and negotiate the best possible deal for your next vehicle purchase.

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