If you were raised by financially savvy parents, they probably stressed the importance of comparison shopping when buying a car. Also, your parents might have spoken about the importance of getting your auto loan directly from a bank or credit union. There are certainly benefits to direct financing. This method lets you compare different rates and terms before buying a car, plus you can get pre-approved for an auto loan in advance and streamline the transaction.
But while there are advantages to direct financing, there are also benefits to indirect auto financing. With the latter, the dealership that sold the car acts as the middleman between you and the finance company. Rather than you finding a lender for your car loan, the dealership does the work for you.
However, when given the choice between direct and indirect financing, you may question the better approach. The truth is, there are no hard or fast rules, and one method isn’t always better than the other. But if you’re leaning towards indirect financing, here are five benefits.
1. You can buy a car and get financing in one place
Going to different banks and comparing loan options takes time. And frankly, some people don’t have this type of time. They need a car, and they need one fast. Therefore, they prefer to buy a car and secure financing in one location. Dealers can locate finance companies for buyers.
2. There are more options if you have bad credit
If you have bad credit, your bank or credit union may not approve your auto loan application. Unfortunately, your personal bank or credit union may not have a loan program that caters to people with low credit scores. It might be easier to work with a company that offers subprime loans through indirect financing. In fact, there are several professional communities that offer these financial services and with some, like Consumer Portfolio Services there is no minimum FICO score and no prior auto credit needed.
3. The option to pay over time
If your bank doesn’t approve your auto loan application, paying cash is one way to purchase a car. This eliminates any worries about whether you’ll be approved for an auto loan — but most people don’t have the resources to pay cash for a vehicle. With indirect financing, you don’t have to pay cash. The dealership that sold the car can locate a subprime lender. You can get a loan like everybody else, and spread the car loan payments over several years.
4. You may qualify for bonus incentives
Indirect financing isn’t only for people with bad credit. If you have good credit, banks are usually eager to write a loan. However, some banks and credit unions do not offer incentives, such as 0% financing or other discounts that might reduce your monthly payment. Although it’s smart to get an auto loan quote directly from a bank, you should always compare this quote with loans offered by indirect lenders.
5. Some indirect lenders offer competitive rates
Some people get financing directly from a bank or credit union because they believe that indirect financing results in a higher rate. This can happen, but it doesn’t always occur.
After an indirect lending company determines a borrower’s loan rate and sends this information to the dealer, some dealers increase this rate to boost their profit. Understand, however, that some indirect lenders offer better rates than banks and credit unions. So, even if a dealer pads the rate, some borrowers still end up paying less interest (or about the same) than if they had secured direct financing.
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Direct financing or indirect financing — that is the question. In the end, getting a fair and affordable interest rate is a priority. And if you have bad credit or no credit history, your chances of getting the keys to a new car are higher with an indirect finance company.