Dealer vs. Bank/Credit Union Financing
Where you finance a car changes more than convenience — it can change the rate, the terms, and who actually holds the loan.
What Is It
When you finance a car through the dealership, the dealer isn't lending you the money directly — it's submitting your application to a network of banks, credit unions, and the automaker's own finance arm, then picking one to fund the loan. Financing directly through your own bank or credit union skips that step: you apply and get approved on your own, then walk into the dealership with financing already arranged.
Why It Matters
The markup is the part worth understanding before you sign anything. Per the CFPB, when a dealer arranges your financing, the bank or credit union quotes the dealer a “buy rate” — the rate it would accept for that loan. The rate the dealer actually offers you is that buy rate plus a markup, which compensates the dealer for arranging the deal. Dealers typically shop your loan to roughly five lenders and present you with only one resulting offer, so it's reasonable to ask whether any of the others came back with better terms.
Getting pre-approved by a bank or credit union before you shop gives you a real baseline to compare the dealer's offer against. Without one, there's no way to tell whether the number you're being quoted reflects genuine pricing or has room built into it.
Quick Example
A credit union quotes a dealer a 6.0% buy rate on a $25,000, 60-month auto loan. The dealer offers the buyer 7.5% instead, keeping the 1.5-percentage-point spread as compensation for arranging the financing. That markup adds roughly $1,050 in extra interest over the life of the loan — money the buyer could have kept by walking in with a pre-approved rate to compare against.
Try It Yourself
Compare what the dealer's rate and a pre-approved rate actually cost over the life of the loan.
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Related Concepts
Sources & Methodology
- Buy rate, dealer markup, and typical number of lenders shopped: Consumer Financial Protection Bureau — What are the different ways to buy or finance a car or vehicle?
- Pre-approval as a comparison baseline before dealer financing: Consumer Financial Protection Bureau — Am I required to get my auto loan through a dealership?
- Quick Example figures calculated using standard amortization on a $25,000, 60-month loan at 6.0% vs. 7.5% APR.