Direct vs. Dealer Lending

When you finance a vehicle, you borrow money from a lender and agree to pay that money back, with interest, over a specified period of time. There are a variety of lenders on the market, including banks, credit unions and various specialty finance companies from which you can secure an automotive loan. Many manufacturers offer financing at attractive rates as well, but you'll need fairly good credit to qualify for these programs. Additionally, interest rates can vary from lender to lender, so it's important for you, the consumer, to do your homework prior to selecting a lender to ensure you're getting the most competitive financing possible. Remember: The biggest factor influencing finance rates and terms will be your credit history.

There are a variety of loan terms available to you. Simply put, a loan term is the length of time you make payments (plus the interest rate) on the vehicle you're purchasing. The most popular loan terms range in length from as short 36 months to as long 96 months, depending on the loan. The longer you extend your loan, the lower your payment will be. Remember, however, you'll end up paying higher interest charges as time goes by.

There are several processes available when you choose to finance your vehicle. You can opt to secure a loan directly from a lender known as direct lending or you can choose to enter into a loan agreement by having a dealer arrange a loan for you through an indirect program they have facilitated on your behalf. This process is known as dealer financing.

With direct lending, you obtain a loan directly from a finance company, bank or credit union and once you enter into a contract with a dealership to purchase a car, you then use the proceeds from the direct lender to pay the dealership for that vehicle.

With dealer financing, you enter into an agreement with the lender the dealer has arranged on your behalf and you agree to pay back the borrowed money, with interest, over a specified period of time. The lender can choose to retain the contract itself or it can assign the contract to another bank, finance company or credit union that, in turn, manages the account and collects the payments.

In either case, no matter the manner in which you finance your car, the lender becomes the official lien holder of the vehicle until you've made your monthly payments, including interest, and the loan is paid in full. Once the loan is paid in full, the lender will issue you a release of lien. At that time, you become both the registered owner and the legal owner.

There are advantages to both processes and it's really up to you to decide whether direct lending or dealer financing is best for you. In some situations, consumers prefer to choose the direct lending approach because they can find competitive interest rates at a bank, credit union or finance company.

Additionally, since most consumers already employ banks or credit unions for a variety of existing financial services, they may be able to finance a vehicle through these same outlets at discounted rates. For instance, some banks offer automotive loans at discounted rates to customers who choose to make their monthly loan payments from their paychecks in the form of direct deposit. offers affordable automotive financing.

Check with your bank, credit union or on-line provider to get a measure of competitive rates.

Remember, however, that in many cases, dealers can offer lower finance rates offered by the factory. Plus, the dealer does all of the work for you. You simply bring the necessary information and sign a few simple documents.

(If you're buying a car from a private party, direct lending is your only option.)

Other buyers prefer to finance through the dealership because they like the convenience offered by dealership financing where they can secure a loan at the same place they purchase their car. Moreover, dealerships typically have relationships with a variety of lending institutions, which means they can offer buyers a range of financing options.

Also, from time to time, dealerships may offer specific incentive programs for buyers, including low-interest rate loans or (Cash back applies if you finance or not) cash back bonuses. And finally, dealerships may offer more flexible lending options than banks or credit unions if your credit is less than ideal.

Again, the decision to borrow money in the form of direct lending or dealership financing is, ultimately, up to you. You need to evaluate your own preferences and your personal financial situation to decide which method is right for you.