Understanding Auto Financing: Direct Lending Vs. Dealership Financing

Your promotion and raise in your salary has finally given you the opportunity to own a car. However, with new car prices ranging between $33,000 and $25,000, it is difficult for you to afford one. Even used cars start from $20,000.

According to Finder, last year, Americans racked up $568.6 billion in car loans. Today, the interest rate on auto loans is 4.21% on monthly payments for 60 months. The good news is, when it comes to financing a car, you have two options: you can either buy a car outright with the loan or you can go to the dealership for a loan and finance the car on their money.

Let’s have a look at what both options offer:

Direct Lending

In this option, you get a loan from a bank, credit union or finance company. The loan terms are the same as any other loan. You enter a contract to buy a car and then pay the financing charge plus the total amount of the car over the years. The monthly payments are decided upon in the contract. The more time you ask for to pay the loan, the higher the finance charge you get on it.

The benefit of direct lending is that once you have researched the cars you can afford with the loan, you can apply for the exact amount. If your credit score is on the up and up and you have no debts, then you can easily get the loan.

Here’s what direct lending offers you:

·        You Can Compare Prices

Once you have got the loan, you can check different dealerships and ask what kind of credit terms they offer. You can then easily pick one that falls under your budget and allows you a little leeway in the contract.

·        Flexible Credit Terms

The longer you take to make the full payment on the car, the more the interest rate will increase. This is why experts recommend that you should set the payment terms for no more than 60 months. After you have shopped around, you will have a better idea of what credit terms you will be able to keep up with and which dealership is more flexible.

Dealership Financing

Dealership financing is a little complicated because most of your decisions are controlled by the auto dealer. You apply for the loan through the dealership and the lender you are referred to works for the car showroom. A contract is signed between you and the dealer on how the payments will be made. Usually, the dealer sells the contract to a bank and then they collect payments.

In dealership financing – another common type of vehicle financing – you get financing through the dealership. You and a dealer enter into a contract where you buy a vehicle and agree to pay, over a period of time, the amount financed plus a finance charge. The dealer may retain the contract, but typically sells it to a bank, finance company or credit union – called an assignee – that services the account and collects your payments.

Here’s what dealership financing offers you:

·        Convenience

You get the loan and the vehicle at the same place. You don’t have to worry about signing extra documents, as everything is discussed in advance and the dealer takes care of it.

·        Multiple Financing Options

Auto dealers have connections with various lenders and banks. This gives you the opportunity to look at several loan options and choose one that may work for you.

·        Special Programs

Let’s assume that your job pays you a low salary, which makes it difficult for you to afford a car. The bank refuses your application because they feel it does not match their requirements. In such cases, an auto dealer might offer you an incentive or low-rate program, which allows you to buy a car easily. However, there are some conditions attached to this program such as shorter contract length or a larger down payment.

Whichever option you are choosing, it’s important that you have a good credit score. This gives you the opportunity to pay a smaller down payment and some auto dealers and their lenders will agree to a lower interest rate. So, now that you know how to finance your new or used car, why not get started with the search.

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