When it comes to financing a vehicle, you have two main options: direct loans and dealer lending. Which should you choose? The right choice depends on a number of factors. Read on below to distinguish between the two and learn the best option for you.
As the name implies, this kind of financing is one you directly obtain from a lender. Sources of direct loans include banks, credit unions, finance companies and online lenders. You apply for an auto loan and after you get approved, you can use the money from the direct lender to purchase a vehicle from a dealership.
With this kind of financing, you get the auto loan and buy the vehicle from the same place—the dealership. Instead of you having to approach a lender, the dealer will arrange the financing for you. The dealer will find a lender who will fund your auto purchase and enter into an agreement with the chosen lender on your behalf. The dealer has the option to keep the contract or assign it to another lender—may it be a bank, credit union or finance company—that will be in charge of collecting the payments.
Direct Loans and Dealer Lending – Pros and Cons
Direct loans allow car buyers to save money in their auto purchase through competitive rates offered by lenders. Because of competition, banks and finance companies keep their rates relatively low. In the case of credit unions, they are non-profit and community-oriented—they can afford to charge their members with low interest. Even a one or two point decrease in interest can mean savings worth hundreds of dollars for you. Before choosing a lender, consider all sources of direct lending here in Houston and see which one offers the best deal.
Also, direct lending enables car buyers to negotiate car prices. When you walk into the dealership pre-approved for an auto loan from a lender (or lenders), you are in a better position to haggle over the purchase price of the car because the financing part is separate and has already been taken care of.
Dealer lending may often come with higher interest rates, but they also have exclusive perks. For instance, only dealerships can offer 0% financing and other car manufacturer discounts. Dealers also have other incentives like cash back bonuses to car buyers.
Another thing that makes dealer lending advantageous is convenience. The dealership is like a one-stop shop, offering both financing and vehicles. You save yourself much time and effort because the dealer will handle everything, and all you will do are bring the required documents and sign the paperwork.
Lastly, dealer lending is a better choice if your credit situation is less than ideal. Dealerships are more likely to offer flexible options to those with poor credit compared to traditional lenders.
Choosing Either Option
Regardless of which financing option you choose, know that lender will hold the lien of the vehicle until you have repaid the auto loan in full plus interest. Once you have settled the loan obligation, the lender will issue a release of lien to you and only then will you become the vehicle’s legal and registered owner.