Dealer Financing vs. Credit Union Financing
Options for Financing Your New Car
When purchasing a vehicle, there are several choices for financing. Two of these are dealer and credit union financing. Each of these options has its advantages and disadvantages. In order to make an informed decision, it is best to learn all there is to know about all of the differences and similarities as well as the pros and cons of each method. In addition, while it is good to educate yourself about both types of lending, it is also good to know what others have experienced. In the following paragraphs, all of these aspects of car lending will be examined.
Important Information about Credit Union Financing
Credit Unions have a long and varied history and have been around as long as banks have, but there are some significant differences when compared to a traditional bank. The underlying principles that govern the operations make it a unique and in some ways attractive option. They are owned by their members as opposed to being owned by an individual or corporation. Because the members have more of an ownership role, the organization tends to be more customer-friendly in some respects. They are not-for-profit organizations, meaning that while they can make enough money to stay solvent, their aim is to serve the customers rather than maximize profits.
Like banks, they provide financial services, including loans. It is possible to receive these services at lower rates when purchasing a vehicle using these institutions. The application process is similar to any other loan application, with a couple of exceptions.
For starters, membership is required before a loan can be taken out. There are different requirements for membership in each establishment, so it is a good idea to find out what these requirements are. Because the assets of these organizations may be more tightly controlled, an individual’s creditworthiness is probably going to be a very important consideration for the institution. For someone who can qualify, there can be a significant savings in loan fees and interest rates.
A Short Explanation of Dealer Financing
Another way to finance the purchase of your new or used vehicle is to go through the dealer. There are many aspects that you should be aware of before deciding to agree to the their terms. Understanding the way these agreements work will help you make a good decision.
For starters, you should be aware that there are a host of options for funding the purchase of an automobile. Car loans are available from a large number of lending institutions who are all competing against one another for your business. The car seller also has a financial interest in providing you with an auto loan.
Keep in mind that a dealership is in the business to make money and it isn’t as if they are just going to hand you anything. A Retail Installment Sales Contract is the actual name for this form of lending and it is one of the products they are selling. Often, dealerships offer many attractive incentives to draw customers in and get them to agree to their lending agreements. For instance, there may be a rebate or a 0% interest loan. But these are usually conditional and require you to have very good credit and take on a loan with a shorter term. And that is fine if you fit the criteria and are able to handle the higher payments that come with a shorter loan. Oftentimes, you will not be able to get both the rebate and the 0% APR together. This means that the total amount you are borrowing will be slightly higher, which in turn will make the payment higher. But this is not even the real bottom line.
The truth of the matter is that the car dealership is not really the one providing the money for the sale price of the vehicle. If this were the case, they would not be likely to remain solvent, much less turn a profit. What is really going on is that the car seller is arranging the lending through a bank, a lending institution or the finance division of a car company. This makes the dealership the middle-man and, of course, means they will get a cut of the profit made by providing you with a loan. In addition to whatever they make on the loan, they will inevitably offer you additional types of insurance, servicing of the vehicle or an extended warrantee.
What are the Benefits of Going Through a Credit Union?
Because going through the dealership is so accessible and seems like an easier route to take when buying a car, you may decide to go with it rather than getting a credit union loan. But there are certain benefits to these lending options that make them a very attractive option.
Beginning with the fact that credit unions, as previously mentioned, are owned by their members, it stands to reason that a they will be more likely to have your best interest in mind. Additionally, one of their primary functions is to provide less expensive funding for members. They are also usually able to offer more competitive rates and longer terms for loans because of their dedication to serving their members. This can also mean that they are going to be more willing to work with you should you run into difficulty and have a hard time making your payments.
Another benefit that your credit union will provide you is a reduction in additional fees. They are, as we discussed earlier, are not-for-profit institutions. This does not mean they don’t make any money but it does mean that they are governed by a different set of rules when it comes to federal or state taxes. What this means for you is that in the end you will not end up paying more overall for your vehicle to cover the cost of taxes. Any savings, no matter how small, is a good thing when it comes to purchasing a vehicle.
Finally, your membership allows you the privilege of being able to sit in on such things as board meetings, where policies are made and changed. A better understanding of how loans are processed and handled by them will also help you as you make the big decision to take out a vehicle loan.
Are There Any Drawbacks to Credit Unions?
Everything has a downside, as you probably know already, and credit union loans are no exception to this rule. In some cases, purchasing your automobile through one of these organizations may not be the best option. Differences in policies and the availability, or unavailability of this method of borrowing may come into play when you are considering the method you will use to finance your car.
For starters, while membership makes borrowing money easier, the fact is there are requirements that must be met to become a member. In some cases, the criteria that must be met to qualify for membership is very broad, but often, it is much narrower.
They may also have a higher standard when it comes to whether or not you qualify for a loan. This could include requiring that you have a higher credit score than other lenders might ask for. Sometimes they will only approve you for a specified amount when it comes to your car loan, which means that if the vehicle costs a little more than this you will have to come up with the difference yourself.
Some of the Benefits of Using Dealers
Dealer lending could be beneficial, in some cases, especially when credit union or other lending institution loans are not feasible or not available. Oftentimes, if your credit rating is less than optimal, borrowing money through a dealership can mean that you are still able to get an automobile. It can even be one way of bringing your rating back to an acceptable level.
The first, and most obvious reason that loans from the dealer are helpful, is that they make the car-buying process practically a seamless experience. It may even be possible to drive off of the lot with a new vehicle within a couple of hours when you finance through them. Additionally, there are a number of products available that can make owning and caring for your automobile easier. Sometimes, they can be more flexible with terms, and sometimes it is possible to negotiate interest rates and payments that suit your budget. In some cases, where the dealership does a lot of lending on a regular basis, they may even be able to offer a better interest rate than other lenders. Last but not least, when poor credit is making it seem impossible to get a much needed vehicle, in some instances, this method of borrowing may be the only option.
Dealer Financing Can also Have Many Drawbacks
Naturally, there are also drawbacks to getting credit from the car seller when making a purchase. Navigating the world of auto lending in house can be tricky, so it is best to do your homework before even going down to look.
For starters, as stated earlier, it is best to keep in mind that the car dealership is a business whose main goal is to make money. The more money they can make by selling a vehicle to you, the happier they are. This can lead to some car sellers being shady or dishonest. Because they are so good at what they do, it can be difficult to tell when someone in the car business is predatory.
The fact that car sellers often do not really finance the loans can mean that you end up paying a lot more for your vehicle in the long run. This is because not only are you paying interest so that the dealership can make money and cover fees, you are also paying additional interest so that the finance company or bank can make their money.
One of the things many people are not aware of is that the person in the financing office is just as much of a salesperson as the person who persuaded you to purchase the vehicle. There are so many ways that the car dealership can make more money when they have an effective salesperson in their Finance and Insurance office. Some of these include selling you one or more of a host of attractive optional services. These can include:
- Extended warrantees
- Repairs and servicing of the vehicle
- Paint or fabric protection
- Alarm systems
- Customizations
- Various types of additional insurance
While all of these can be very beneficial, they are also more profitable for the dealership and salesperson then they are necessary to you. These things may be offered at what seems like a great discount, especially when the friendly salesperson tells you it will only add a few cents daily to your payment.
Depending on how good you are at negotiating, you might be able to get a real bargain by using in-house financing. On the other hand, both the car salesperson and the salesperson in the financial department may be able to outwit you and pad their own pockets while you struggle to make your car payment each month. When the time comes to make the final decision, you want to be armed with all the information possible.
How to Know Whether or Not Dealer Financing is a Good Choice
You may be wondering what circumstances call for getting a dealer loan. There are many factors that should play a part in answering this question. Everyone is different and brings a different set of problems or criterion into the process of buying a car. To know when this type of financing is a viable option, there are a few things you should consider.
When you have looked at all of your options first, you may decide that borrowing through a dealer is a good option. One thing that may make it attractive is the availability of special incentives such as a substantial rebate or 0% financing. Other things that may make these loans a better choice for you are the ease of the transaction or the fact that you may be unable to secure other funding.
How to Know When it is Best to Go Through Your Credit Union
Here are some of the determining factors to take into account before making this decision. You may already be a member who enjoys a good relationship. As such, you might have the advantage of having learned things that allow you to be a smarter buyer. In addition, if you have done some digging and taken a hard look at all of your options, you might have learned that the best interest rate and payment schedule is available through them. Another consideration might be that they have already established a good relationship with the business you are buying a car from. This would give you greater peace of mind if you knew that both the car seller and the credit union were trustworthy and interested in your welfare. Finally, your credit union may be able to offer you additional discounts or special offers because you are a member.
Buying a Car Can Be a Rewarding Experience
In the end, the best thing you can do is to take some time to learn as much as you can about purchasing your new vehicle. Go to several dealerships and look at a variety of cars so you can determine whether they are offering fair prices. Get online, explore your options and read up on the ins and outs of car financing. Visit your credit union and take some time to learn about the requirements for getting a loan and the potential benefits that might be available. By spending some time learning everything you can before making such a major purchase, you could be saving yourself much difficulty and heartache in the future. Part of the enjoyment of your new car will be in knowing that you got a fair price and have not been deceived or robbed blind by lousy financing.
Resources
- http://www.realcartips.com/carloans
- http://www.carsdirect.com/auto-loans/trusting-in-house-car-financing
- http://autos.aol.com/article/negotiate-car-financing/
- http://auto.howstuffworks.com/buying-selling/car-financing2.htm
- http://www.realcartips.com/carloans/220-how-much-dealers-make-car-financing.shtml
- http://www.bankrate.com/finance/auto/6-reasons-to-get-a-credit-union-car-loan.aspx
