When you’re thinking of a car purchase, there are several ways in which you can finance it, like through financial institutions like credit unions or banks and directly through the dealer. But whether or not to choose financing from a dealer or from the bank is indeed a tough decision which is based on multiple considerations. Unless you know the difference between the 2 options to finance loans, you won’t know which one is the best for you. Comparing and contrasting the two options is the key, especially when you are eager to choose that option which can help you save money.

Car loans from the bank and dealership finance

When you take out a car loan, you get a lump sum amount which you can use to purchase the dream vehicle. Your car will automatically become the collateral to the loan and hence you can obtain competitive rates as compared to the unsecured loans, which will vary between 6-10% p.a. But in case you default on the car loan, you may run the risk of losing your vehicle. Repayment terms on car loans are between 1 and 7 years and the rates can get variable and fixed as per your requirement.

On the other hand, with dealership finance, you get financed by the car dealer. For example, if you’re about to buy a car from Toyota, they will finance you a loan with comparatively low rates or sometimes even with no interest rates at all. With regards to dealership finance, you will obtain low rates but during the end of the loan term, you will require making a balloon payment which will be an amount of thousand dollars.

Interest rates – Car loan vs. dealer finance

Car Loan:

• Lenders offer different rates and you can choose the most competitive one
• Uses your car as security and allows you to reap its benefits

Dealer finance:

• Offers lower rates than car loans
• Low rates might be applicable to specific models and makes
• Salesman’s commission might push up the rates
• 0% deals can indicate increased purchase price of cars

Benefits – Car loan vs. Dealer finance

Car Loan:

• Wide array of loans available
• Repayments will allow you to pay back your car loan in full
• You’re allowed to choose the loan and the lender
• Loans are offered for new, classic and used cars

Dealer finance:

• Representative of the dealer handles all paperwork
• No requirement of shopping around
• Once you pay the balloon payment, you will save money
• You’re allowed to negotiate the sales price of the car

What are balloon payments?

One of the biggest pitfalls of dealership finance is the requirement of making balloon payments. In order to keep your installments low, hundreds of dollars will be taken off the price of the car and this is called the balloon payment. Although you won’t be charged any interest rate, yet you have to pay back this amount at the end of the term.

So, depending on your financial situation and your personal finances, you may choose between bank loans and dealership finance. Whichever option you choose, make an informed decision.