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. 

Securing your own financing can typically result in a lower interest rate; and since there’s a relationship between rates and monthly payments, getting a loan directly from a bank can result in a lower monthly payment. 

This approach — known as direct financing — 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 — short, simple and to the point. 

But while this method is convenient and simple, it isn’t always the best approach. Unfortunately, some banks only offer car financing to certain people — 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, you’re pretty much guaranteed an auto loan with no money down. 

However, let’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 you’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 isn’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. 

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 don’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 isn’t time to boost your score. You need an immediate solution; and unfortunately, some banks aren’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 isn’t always the case with indirect financing. Once you complete your loan application at the dealership, the dealer’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 shouldn’t be difficult to secure financing. And although you may get hit with a high interest rate, think of this as a temporary inconvenience. 

As you make your car payment each month (on time) and add positive information to your credit report, your score will increase — and in the future, you’ll qualify for much better rates.