Is it better to get a car loan from a bank or dealer?

Get pre-approved from a bank or credit union first, then compare to the dealer offer. Credit unions often have the best rates. Dealers may beat your rate with manufacturer incentives (like 0% financing), but may also mark up rates for profit.

Do dealers mark up interest rates?

Yes, dealers often add 1-3% to the buy rate from their lender as profit. This is called dealer reserve. Pre-approval gives you leverage to negotiate or use your own financing.

Bank vs Dealer Financing: Which Is Better for Your Car Loan?

Quick Comparison

Factor	Bank/Credit Union	Dealer Financing
Best Rates	Credit unions often lowest	0% manufacturer offers
Rate Markup	No markup	Often 1-3% added
Convenience	Extra step required	One-stop shopping
Negotiating Power	High (you're a cash buyer)	Less leverage
Special Offers	Rate discounts for members	Manufacturer incentives

The Smart Strategy: Get Pre-Approved First

The single best thing you can do is get pre-approved before visiting a dealer. This gives you a baseline rate to compare against and massive negotiating power.

Benefits of Pre-Approval

✓Know your rate before shopping – No surprises in the finance office
✓Negotiate as a "cash buyer" – Focus only on price
✓Compare to dealer offers – Force them to beat your rate
✓Avoid rate markup – Dealers can't inflate your rate

Understanding Dealer Rate Markup

Here's something most buyers don't know: dealers often mark up the interest ratethey offer you and keep the difference as profit.

How Dealer Reserve Works

1. Dealer submits your application to their lenders
2. Lender approves you at a "buy rate" (e.g., 6%)
3. Dealer offers you a higher rate (e.g., 8%)
4. Dealer keeps the 2% difference as profit ("dealer reserve")

On a $30,000 loan, a 2% markup costs you ~$1,900 over 60 months!

When Dealer Financing Wins

Sometimes dealer financing is actually the best deal. Here's when:

0% or Low-Rate Offers

Manufacturer-subsidized rates (0%, 1.9%, 2.9%) beat any bank rate. Usually for well-qualified buyers on specific models.

Rate vs Rebate Trade-off

Sometimes you can choose between special APR or a cash rebate. Calculate which saves more for your situation.

Credit Challenges

Dealers work with multiple lenders and may get approval when banks decline. Captive financing may be more flexible.

Convenience

One-stop shopping is simpler. If the dealer matches your pre-approval rate, it may be easier to finance through them.

When Bank/Credit Union Financing Wins

Credit Unions Are Often Best

Credit unions are non-profit and pass savings to members. They typically offer:

• Rates 0.5-2% lower than banks
• More flexible credit requirements
• Lower fees
• Better customer service

Not a member? Most credit unions have easy membership requirements.

Step-by-Step: Getting the Best Rate

1
Check your credit score
Know where you stand before applying
2
Get pre-approved from 2-3 lenders
Bank, credit union, and online lender. Multiple inquiries within 14 days count as one.
3
Shop for the car as a "cash buyer"
Negotiate only on price, not monthly payment
4
Let the dealer try to beat your rate
Show them your pre-approval. They may match or beat it.
5
Choose the best option
Compare APR, term, total cost. Use whichever is lowest.

Watch Out for These Dealer Tricks

✗Payment packing: Inflating payment to hide add-on products
✗"Spot delivery" games: Calling you back saying financing fell through, now at higher rate
✗Focusing on payment: Extending term to hit your payment target while hiding total cost
✗"We can beat any rate": Then offering the same rate you already have

Bank vs Dealer Financing