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Financial Institution Financing vs. Dealer Financing

What's the best way to finance your new or used vehicle purchase: through the dealership or your financial institution? Getting an auto loan from a financial institution offers numerous advantages and can ultimately help save you money.

With auto loans available at very attractive rates, now might be a good time to consider trading in your present vehicle for something that suits your needs better. You may see some car companies and dealers advertising very low rates, but these can come with surprises. For example, the very fine print in the ad may state that only borrowers with exceptionally high credit scores will qualify. If you don't meet that standard, a dealer might quote you a much higher finance rate.

The car financing experts at Edmunds.com offer a number of tips for getting the best auto financing.

First, check your credit report before you start shopping, and address any errors with the credit reporting bureau. Your credit history remains the most important factor influencing the finance rates and terms you can get.

"Next, nail down a low-interest loan from an independent lender such as your credit union or bank. Then and only then, hit the car lot and start shopping," says Edmunds.com.

The main reason that Edmunds.com recommends using financial institution financing versus dealer or manufacturer financing is that, with your loan approval in hand, you have much more control in the price-negotiating process. That's because you go into the dealership already knowing your financing rate and terms.

On the contrary, by getting your financing through the dealer, you could end up with a significantly higher rate than you see advertised. The dealer will often be obtaining the financing from a third party, such as its own financial institution, and then marking up the interest rate for extra profit. It's a legal practice, but it can cost you money. For example, let's say you qualify for a 4 percent APR rate. The dealer's finance and insurance (F&I) manager may instead quote you 7 percent or even higher, seeking the extra profit for the dealership. You can try to negotiate that lower, but many people don't know to do that or might be uncomfortable negotiating.

If you secure an auto loan from a financial institution, you go into the dealership without having to worry about such tactics raising your cost for the vehicle. You've already arranged your loan before going to the dealership and you're now a "cash buyer." The loan from your financial institution is going to pay for the car in one lump sum. In this position of strength, you can focus on negotiating the full price of the car rather than on the monthly payment. If you plan to borrow $20,000 at 4 percent APR for 60 months, for example, you have the security of knowing before you go into the dealership that your payment will be $368 per month. If you ultimately can negotiate a lower purchase price, then your monthly payment will be even lower.

In contrast, if you seek dealership financing, and the dealer puts you in a 60-month loan at 7 percent APR, you'll pay $396 per month for the same $20,000 borrowed. That $28-per-month difference might not sound like a lot while you're still sitting in the showroom admiring your new dream car, but it will add up to nearly $1,700 over the term of the loan.

Which position would you prefer to be in when buying a new or preowned vehicle? Come in and talk to a loan representative about your auto financing options today.

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