a male buyer working with a car salesman on the best way to finance his new car

When it comes time to buy a car, there are lots of options for financing. It can be difficult to know the best way to finance a car. One factor that goes into this is what type of financial institution you get your loan from. The three most common options are banks, credit unions, and dealerships. Each comes with pros and cons. We’ve outlined some of the attributes of each to help you narrow down the right option for you.

What To Look For in a Car Loan

Comparing car loans can be tricky. Especially when you throw in promotions from dealers, it can be even more difficult to tell how much each loan will end up costing you.

As a general rule, look for the lowest APR and the shortest loan where you can still afford the monthly payments. You can use car loan calculators to compare loans with different terms and conditions to see how much you’ll end up paying each month, but also how much you’ll end up paying overall. Typically, the longer the loan, the more you’ll end up paying in interest.

Credit Unions, Banks, and Dealers…Oh My!

Let’s start by defining each of these institutions, and how their structure might affect the loans you can get.

1. Credit Unions

Credit unions are not-for-profit financial institutions that are owned by their members. Usually, a credit union serves a particular demographic: for example, defined by region or occupation.

Because credit unions are not-for-profit, they can afford to offer loans with lower APR. In addition, credit unions exist to serve their members – thus, they will often work with borrowers with lower credit scores to help them obtain a car loan.

2. Banks

Banks are financial institutions that provide lending services and make their profits off of the interest rates charged. Large banks can sometimes offer lower APR, but this may come at the cost of less convenient customer service. In addition, banks may have stricter requirements for credit scores to access these low rates.

3. Dealers

Dealer loans are loans that are offered at the dealership at the time you purchase your new vehicle.

Getting a loan from a dealership means you pretty much accept the offer the dealership has. Sometimes, dealers run promotions on certain car models that can be an excellent value. However, in other cases, you can easily find a better deal by shopping around at your local credit union.

When a dealership offers 0% APR, it’s important to see if you qualify. These premium deals are often only available to customers with the best credit scores. In addition, some only offer 0% APR for a limited time or charge fees to make up for lost interest, so be sure to check into the terms and conditions.

Institution Pros Cons
Credit Union Not-for-profit, local, great member service, willing to work with consumers with low credit, good deals on APR, member benefits, lower loan minimums, lower fees Membership is required (but usually cheap and easy to get)
Bank Sometimes offer premium loans with low APR, large banks have many branches Can have poor customer service, sometimes difficult to get approved, higher fees
Dealership Occasional promotions that can save you a lot of money on APR Limited options, no ability to shop around, sometimes higher APR

Deciding On The Best Way To Finance a Car

With all big purchases, it’s important to spend time shopping around for the best deal. One way to compare your options between institutions is by using a loan calculator.

You can check out the loan calculators on our website to compare loans. You can keep a spreadsheet of the APR, loan term, and loan amount between institutions and then plug them into the calculator to compare.

It’s also important to be aware of what your credit score is and know what you can likely get approved for. Credit unions have representatives to help you figure out what you can qualify for. This is a great idea if you are planning to head to a dealership to negotiate the best deal. Knowing what you can qualify for at other institutions allows you to bargain for lower APR at the dealership.

Another way to know what you will be approved for is to apply for pre-qualification for your top 2-3 car loans. This is essentially a process that assures you will receive a particular loan. Pre-qualification also lets you bargain, but it helps you set a budget for when you are shopping so you don’t fall victim to great salesmanship.

Researching the various ways to finance a car is also important to your overall experience and the deal you receive. Check out our blog post that covers everything you need to know about car loans before heading out to shop!

How Car Loans Work