Most people start the car-buying process by searching for vehicles. They compare models, browse dealership inventories, check prices, and eventually visit a lot to take a test drive.
Financing often comes later.
That order is convenient, but it can put you at a disadvantage. If you expect to borrow money for your next vehicle, shopping for the loan before shopping for the car can give you a much better idea of what you can afford and whether the financing offered at the dealership is actually competitive.
Know Your Financing Options Before You Shop
You are not required to finance a vehicle through the dealership where you buy it.
Banks, credit unions, and other lenders may allow you to apply for financing independently. Getting preapproved gives you an estimate of the interest rate, loan amount, and terms a lender is willing to offer before you commit to a vehicle.
The Consumer Financial Protection Bureau recommends getting quotes from multiple lenders before shopping for a car, noting that doing so may help buyers find better rates and loan terms.
That doesn’t mean you have to reject dealership financing. Instead, you arrive with another offer against which you can compare it.
Separate the Car Price From the Loan
Walking into a dealership without financing already considered can make it easy for the entire purchase to revolve around one question: What monthly payment can you afford?
Monthly payments matter, but they don’t tell you whether you’re getting a good deal.
A dealer could potentially lower the payment by extending the loan over a longer period. You pay less each month, but you may pay considerably more interest over the life of the loan.
It is usually better to negotiate and evaluate the vehicle’s purchase price separately from the financing.
Once you know the price, compare loans based on APR, term, amount financed, monthly payment, and total cost.
Preapproval Gives You Something to Compare
Suppose your bank preapproves you for a 60-month auto loan at a certain APR.
You can still ask the dealership what financing it can offer. If the dealer beats your existing offer without introducing unfavorable terms, dealership financing could actually be the better choice.
If it doesn’t, you already have another option.
This is important because dealer-arranged financing may include compensation for the dealership. The CFPB explains that a lender can provide the dealer with a “buy rate,” and the rate ultimately presented to the customer may be higher.
For a closer look at how this process works, this guide explains why you should never finance with a car dealership without first exploring and comparing your alternatives.
Don’t Automatically Reject a Dealer Offer
There is an important exception to the general advice.
Dealership financing isn’t inherently bad. Manufacturers sometimes offer promotional financing, including low-interest offers for qualifying buyers. A dealer may also find a lender willing to beat the financing you arranged independently.
The FTC specifically recommends comparing financing offers from several creditors and the dealer rather than assuming one source will always provide the best deal.
The problem isn’t accepting dealership financing. The problem is accepting it without knowing whether you could have received better terms elsewhere.
Shop for Two Things, Not One
Buying a financed vehicle is really two transactions.
You’re buying a car, and you’re borrowing money.
A great price on the vehicle can be undermined by expensive financing, just as an attractive interest rate doesn’t make an overpriced vehicle a good purchase.
Before visiting the dealership, check your credit, establish a realistic budget, and compare financing options. Then you can focus on finding the right vehicle knowing you already have a benchmark for what a competitive loan looks like.