Just kidding! This is a violence free zone. But that got you to click, right?
Generally when purchasing a car, barring some kind of generous benefactor, you have two financing options: direct lending and dealership financing. It’s temping to go with whoever gets to you first – after all, you just want a car, right? Unfortunately, financing major purchases isn’t as simple as just getting approved and the two options have distinct pros and cons.
What is direct lending, anyway?
If you go with direct lending, that means you’re getting the loan directly from a bank, credit union, or finance company. It’s sort of like a credit card: you agree to pay a certain amount over X period of time and then you’re typically responsible for a finance charge. When you directly lend, the institution you’re lending from can also give you certain stipulations on which kind of car you’re allowed to buy.
For example, I got my loan from the bank. My dream car was a used 2005 Mustang that had 70,000 miles. It fit well into my budget, was in excellent condition, and by all accounts a great deal! But when I went to the bank, it wasn’t approved.
For my loan, the car had to meet the following criteria:
- Manufactured after 2011
- Under 70,000 miles
- Market value of at least $10,000 – so this means that it didn’t only need to cost at least that amount, it also had to be worth that amount
For me, it made it a little bit difficult to find a car that I wanted to drive. If you have new or bad credit especially, this is a risk that you must be willing to take when going with a direct lending option.
We also recommend paying attention to the credit terms when they’re given to you which sounds like an easy mistake to avoid, but here we are!
If they can wield that much control over your purchase, are there at least perks?
Totally! Here are some doors that open up with direct lending:
- SHOPPING AROUND: You don’t have to jump on the first bank (or credit union or finance company) that offers you a loan. You can ask several and see who offers you the best deal.
- CREDIT TERMS: You know your rate and other terms while you’re shopping.
Tell me about this dealer financing thing….
Great question. This option is when you get your financing straight through the dealership. Same deal: pay X over Y period of time, plus a finance charge. Sometimes it remains through the dealer, but more often than not, the contract you sign for your loan gets sold to a bank, finance company, or credit union (“assignee” in legal speak). All that means is when you go to pay, instead of paying straight to the dealership, you pay to whoever they sold the contract to. They’ll be the people you contact if you have any questions or concerns about your payment or account.
And now, for the perks:
- One stop shop: They’re usually in one location.
- Multiple financing options: More flexibility in what your finance plan looks like.
- Special programs: Sometimes there are low-rate or incentive programs you can take advantage of depending on your credit score, down-payment you’re willing to put down, et al.
I scrolled all the way to the bottom of this article and I STILL don’t know which option is better.
The truth is that it depends on your credit score, what you’re looking for in your car purchasing odyssey, and what you’re willing to spend. Everyone’s situation is different and this is just a brief introduction! Shop around before you make a decision – comparison shopping is the only way to figure out which option makes the most sense for you. And, of course, we can offer you a few pointers.