Is It Better to Get a Bank Loan for a Car?

Financing a car involves navigating various loan options. This article explores whether obtaining a car loan directly from a bank or credit union is a preferable option compared to financing through a car dealership. It details the distinctions between these financing avenues and provides guidance on preparing for and securing a bank car loan.

Key Differences Between Bank and Dealership Financing

When considering a car loan, two primary sources are available: banks (including credit unions) and car dealerships. Dealerships often serve as intermediaries, arranging financing through various lenders, which can lead to marked-up interest rates. In contrast, banks and credit unions directly lend funds, often resulting in more competitive and transparent interest rates due to lower overhead. For instance, in June 2025, the average interest rate for a new 60-month car loan from a credit union was 5.75%, while a bank’s average was 7.49%.

Banks offer a broader range of loan terms and greater flexibility in repayment schedules, allowing borrowers to tailor the loan to their financial situation. Dealerships, while convenient, may have more limited options based on their partnered lenders. Banks also offer a pre-approval process that provides a clear budget before car shopping begins. This pre-approval strengthens a buyer’s negotiation position on the car’s price at the dealership, as financing is already secured.

Dealership financing, often perceived as a “one-stop shop,” provides convenience by handling the financing on-site. However, this convenience might come at the cost of transparency, as dealerships may submit applications to multiple lenders, potentially leading to multiple credit inquiries. Banks involve a more direct process. Banks and dealerships may also have different administrative charges or hidden costs. Dealerships, for example, may inflate interest rates to earn a commission.

Preparing for a Bank Car Loan Application

Before applying for a bank car loan, several preparations are required. A strong credit score is important, as it indicates lower risk to lenders and can lead to more favorable loan terms and lower annual percentage rates (APRs). A FICO score of 670 or higher is considered good, and a VantageScore of 661 or above is sought for prime rates. Checking your credit report for accuracy before applying can help ensure the best outcome.

Lenders require proof of income and employment to assess repayment ability. Common documents include recent pay stubs, W-2 forms, and bank statements. Self-employed individuals may need to provide 1099 statements or tax returns from the most recent two years. The debt-to-income (DTI) ratio compares monthly debt payments to gross monthly income. Lenders prefer a DTI below 36%, though some may approve loans with a DTI up to 45% to 50%, especially for those with less-than-perfect credit.

Making a down payment can significantly benefit a car loan application. A larger down payment reduces the loan amount, lowers monthly payments, and decreases the total interest paid over the loan’s life. It also signals commitment to the lender and can improve approval chances, particularly for those with lower credit scores. While a 20% down payment is recommended for new cars and 10% for used cars, any amount helps. Finally, personal information such as identification (driver’s license, passport), proof of residence (utility bills, mortgage statements), and vehicle details (make, model, VIN, purchase price) will be necessary.

Applying for and Securing a Bank Car Loan

Once preparations are complete, the next step involves applying for a bank car loan. This process begins with selecting a suitable lender, which involves comparing rates and terms from various banks or credit unions. Many banks offer online application portals, or you can apply in person or over the phone. Existing bank customers receive preferential rates or quicker pre-approvals.

After submitting the application, the bank initiates a review and approval process. This includes a credit check, verification of income and employment, and assessment of the provided documents. The timeline for approval can vary, ranging from a few minutes for those with strong credit and online applications to several days if additional documentation or verification is needed. Some lenders provide instant approval, while others take 1-3 business days.

Upon approval, the bank extends a loan offer outlining the interest rate, annual percentage rate (APR), loan term, and repayment schedule. It is important to carefully review these terms to ensure they align with your financial plan. Finalizing the loan involves signing the loan agreement and setting up payment arrangements, through automatic deductions. Subsequently, the loan funds are disbursed, transferred directly to the dealership or provided to the borrower as a check to complete the car purchase.