Should I Apply for a Car Loan Before Going to the Dealer?

When purchasing a vehicle, buyers often wonder about financing: should they secure a loan before stepping onto a dealership lot, or explore financing options offered by the dealer? Understanding the different avenues for obtaining a car loan can significantly influence the buying experience and the financial terms secured. This article clarifies these paths to help individuals navigate car financing.

Benefits of Pre-Approved Car Loans

Obtaining a pre-approved car loan from a bank, credit union, or online lender before visiting a dealership offers several advantages to the buyer. Knowing the exact loan amount and estimated monthly payment in advance allows for a clear understanding of the budget before car shopping begins. This financial clarity can streamline the selection process, ensuring that focus remains on vehicles within a predetermined price range.

Having pre-approved financing can also enhance a buyer’s position during price negotiations for the vehicle itself. Since the financing is already secured, the buyer can concentrate solely on negotiating the car’s purchase price, separating it from the complexities of loan terms. This separation can lead to a more favorable vehicle price, as the dealer understands the buyer is ready to complete the transaction.

Seeking pre-approval provides an opportunity to compare various loan offers from multiple lenders, potentially leading to a lower interest rate and more favorable terms. This competitive comparison can result in substantial savings over the life of the loan. The pre-approval process also reduces the amount of paperwork and time spent on financing discussions at the dealership, allowing for a more efficient buying experience.

How Dealership Financing Works

Dealerships offer financing options to car buyers, acting as intermediaries between the customer and a network of lenders. This arrangement provides a convenient “one-stop shop” where a buyer can select a vehicle and arrange financing. Dealerships work with various banks, credit unions, and captive finance companies to secure loan approvals for their customers.

Upon completing a credit application, the finance department submits it to multiple lenders within their network. These lenders then respond with loan offers based on the applicant’s creditworthiness. Dealerships can sometimes offer competitive interest rates, especially through special manufacturer incentives, promotional rates, or lease programs.

Dealerships include a “dealer reserve” in the interest rate offered to the customer. This reserve is added to the wholesale rate, representing a profit for the dealership. While convenient, this practice means the interest rate may be higher than what a buyer could obtain directly.

Key Considerations for Your Decision

Making an informed decision about car financing involves evaluating financial circumstances and preferences. A strong credit score makes obtaining competitive pre-approved loan offers more straightforward. Conversely, individuals with lower credit scores might find that dealerships have relationships with subprime lenders, potentially offering financing when direct lenders might not, though often at higher interest rates.

Time availability and convenience also play a role. Some buyers prefer to complete research and secure financing independently before visiting a dealership, valuing the control this offers. Others may prioritize the convenience of handling car selection and financing at the dealership, streamlining the purchase process.

The comfort level with negotiation is another factor. Having a pre-approved loan can simplify negotiations by allowing the buyer to focus solely on the vehicle’s price, removing the financing component from the bargaining table. Regardless of the chosen path, compare all available loan offers, whether from direct lenders or through a dealership, to ensure favorable terms. Focusing on the “out-the-door” price, which includes all taxes, fees, and the total cost of the loan, provides a complete picture of the financial commitment.