Key differences between bank and dealer auto loans

When buying a car, there are a lot of decisions to make: Should you buy new or used? An SUV or a sedan? What color do you want? And do you need any specific features? But the question that may be the most important is, where should you get your car loan, through your bank or the dealership?

The answer is, it depends. Neither option is inherently better than the other, but you could save time and money by comparing rates and loan terms.

Quick summary comparison

Through a bank

• You can apply for a loan before you start shopping for a car, locking in an interest rate for a set time frame.
• Bank loans can usually be used at any franchise or independent dealership, or in some cases, a deal with a private seller.
• You might get a better deal — or a quicker approval — if you're already a customer at the bank. Options may be limited depending on the bank you choose.

Through a dealership

• You'll usually have to choose the car you want to purchase before applying for a loan through the dealer.
• You might be able to take advantage of incentive offers if you use their financing.
• Your lender options are limited, and you might not get to choose who services your loan.

Financing through a bank

It's a good idea to talk to a bank about a car loan before you start shopping. That way, you can understand the loan process and roughly how much they'll lend you. You might find a bank offers a better annual percentage rate (APR) than dealer financing, and you can lock in that interest rate for a set time, on average 30 days. This takes some of the pressure off you as you shop.

A bank loan can typically be used if you plan to buy a used car from a private seller. Usually, bank loans are good at most franchise and independent dealerships, which gives you more shopping options. A bank might also be more willing to work with you on financing if you're already a customer at that bank. The process may go smoother because the bank will already have access to your financial information.

There are some drawbacks when it comes to financing through your bank. Banks might not offer as much flexibility as dealers if you have poor credit.

You'll also need to keep in mind that the rate you're quoted by a bank during the prequalification process, should they have that option, isn't a firm, final offer. When you go to purchase the car, the lender will run a hard credit check and could adjust your loan terms based on your credit or on the car you've selected to buy.

Financing a car through a dealership

Dealer financing has some similarities to financing through your bank: You'll fill out a credit application and they'll run a credit check to look at your credit history. Then, the dealer will do the rest for you: submit your application to multiple lenders and present an offer to you. You should ask to see all offers the dealer sees so you can choose the best option for you.

Many people with bad credit turn to in-house financing at a dealer. And while it seems convenient, you should be wary. Some dealers — and some banks — offer subprime financing that doesn't require a credit check, but these loans can be expensive, with strict fee and down payment requirements.

If you finance through direct dealer financing, you might be able to take advantage of incentives like a low APR for qualified buyers or discounts on optional features for your car, such as seat warmers or leather interiors. Dealers also might offer promotional financing on the newest car models if you're looking for a new car. On the other hand, if inventory is limited or rates are low, dealers are less inclined to offer incentives like these.

Some of those loan promos, like a $0 down payment, might seem like a positive, but they could end up costing you more in interest in the long run. It's also in a dealer's interest to negotiate a higher APR with you than what the lender offers and keep the difference as compensation — making money off the financing.

How to choose the best option

Once you've got the details of the loans offered by the dealer, compare them to the loan terms you got from your bank. Usually, the one that saves you the most money is the best option, but it's not always easy to tell which loan offers the best savings. Make sure you understand all the terms and conditions of each loan, and look at how the different loans would fit your monthly budget and your long-term financial plans. It's important to consider the total cost of your new vehicle when figuring out how much you can afford.

You'll want to determine the total amount you'll pay over the life of each loan and weigh any trade-offs. For example, you might not mind paying more overall with a longer-term loan if the monthly payments are lower.

When you're collecting loan offers, it's important to remember that applying for an auto loan can affect your credit score. Getting prequalified for a loan may not result in a hard inquiry on your credit, but actually applying for a loan will, which can lower your score. Applying for multiple loans in a short timeframe can add up to several hits to your credit, but if you do all your rate shopping in a short period, those inquiries may be combined into one when your credit score is calculated.

It's important to know your budget and how a monthly car payment will fit into it so you can clearly weigh your loan possibilities and go with the option that's best for you. Then you're ready to get behind the wheel of your new car and hit the road.