Are you looking to purchase a new car? If so, multiple financing options are available to you. Some car buyers prefer to secure their own financing from a bank or credit union. And to be perfectly honest, many financial experts recommend this type of financing.Â
Securing your own financing can typically result in a lower interest rate; and since thereâ€™s a relationship between rates and monthly payments, getting a loan directly from a bank can result in a lower monthly payment.Â
This approach â€” known as direct financing â€” can also speed the car buying process. With your financing already in place, you can walk into any dealership, pick a car, negotiate the price, and the bank issuing your loan will send a check to the dealership â€” short, simple and to the point.Â
But while this method is convenient and simple, it isnâ€™t always the best approach. Unfortunately, some banks only offer car financing to certain people â€” namely people with good credit. The definition of good credit varies by bank and credit union; but if you have a credit score of 680 or higher, youâ€™re pretty much guaranteed an auto loan with no money down.Â
However, letâ€™s say you prefer to secure financing through the dealership. This is another option, and some people prefer this approach because they can get a car and loan in one place. There are certainly benefits to direct financing, but youâ€™re not guaranteed the lowest interest rate. In fact, if you secure financing through the dealership, the dealer might inflate your interest rate to increase their profit. This isnâ€™t the best news if you have good credit, thus able to qualify for the best rates. But if you have a shaky credit history and need auto financing, indirect financing can be a godsend.Â
To put it plainly, indirect financing is a loan you receive at the dealership through a financial institution. These institutions have a general outlook on the process regarding the dealership and their position; being that yes, these dealers may write out the loans but it’s ultimately up to the “bank” or a lender such as Consumer Portfolio Services. Simply put, they have the final say.
Yes, dealership financing adds a middleman into the mix. However, if you donâ€™t have the best credit history, the dealership can connect you with lenders that are willing to issue a loan. Of course, improving your credit and then applying for financing is one way to ensure an excellent rate. But if you need a new car today, there isnâ€™t time to boost your score. You need an immediate solution; and unfortunately, some banks arenâ€™t going to give you the time of day. And if they do approve your auto loan, they may require a cosigner or a down payment.
This isnâ€™t always the case with indirect financing. Once you complete your loan application at the dealership, the dealerâ€™s finance team will search its database to find the best loan program and lender. Some lenders work specifically with people who have no credit and bad credit. Therefore, it shouldnâ€™t be difficult to secure financing. And although you may get hit with a high interest rate, think of this as a temporary inconvenience.Â
As you make your car payment each month (on time) and add positive information to your credit report, your score will increase â€” and in the future, youâ€™ll qualify for much better rates.