Dealer financing vs. a bank or credit union loan

Two ways to borrow for the same car

• Direct lending. You apply to a bank, credit union or online lender, get a decision (often called a pre-approval) with a rate and a maximum amount, and take that to the dealer.
• Dealer-arranged financing. The dealer takes your application and sends it to one or more lenders — sometimes the carmaker's own finance company — and offers you a loan at the dealership. The contract is often signed with the dealer and then assigned to the lender.

Neither is automatically cheaper. Carmakers' finance companies sometimes run promotional rates on specific models; direct lenders let you know your rate before you negotiate. What matters is the rate and the terms you end up with, not the channel.

Why the rate at the dealership can differ

When a dealer arranges the loan, the rate offered to you is not necessarily the lowest rate the lender would accept: the Consumer Financial Protection Bureau describes how dealers may be allowed to add to the lender's rate and keep part of the difference as compensation. That is one reason to arrive with an offer from a direct lender — it gives you a number to compare against.

What one percentage point is worth

On $30,000 over 60 months, each point of rate changes the payment and the total interest like this:

Going from 7 % to 8 % on this loan costs $855 more in interest over five years — for the same car.

Comparing two offers fairly

1. Compare the same amount financed and the same term; otherwise the payments aren't comparable.
2. Compare APRs, which include certain fees, rather than payments alone.
3. If an offer only gives you a payment, work out its rate with «Find the rate» and compare that.
4. If a promotional rate comes instead of a cash rebate, compare both with the cash back vs. low APR calculator.

Sources

• Consumer Financial Protection Bureau — auto loans : shopping for a loan, getting pre-approved and understanding dealer financing.