Why You Should Finance Your Car At a Credit Union vs a Car Dealership

Most consumer advocates agree you will find a lower interest rate and fewer fees with your auto loan when financing at a credit union. So why do a majority of Americans take out an auto loan through the dealership?

image of unhappy man at car dealership

One of the biggest factors is time. People are busy. Visiting your local credit union for your next car loan adds an extra step before buying your vehicle. Getting a new car is exciting, right? Who has time to wait? Our advice is to slow your roll. You will most likely end up paying more by rushing ahead and financing through the dealership; either through costly fees and/or a higher interest rate. 

Another reason why dealership financing is so common is that many people are simply unaware of the money they can save by getting a car loan through a credit union. The first thought on car buyers' minds is usually the vehicle, not how to fund it. The lack of research into finding the best lending option is also attributed to a car dealership's advertising dollars. And no, we're not talking about the 'wacky, inflatable tube man'.

Flashy car dealership advertisements on TV and social media often promote "no credit checks" or "0% APR financing." These catchy media tactics are successful in tricking consumers into abandoning their financial institution and financing their car at the dealership. But as we all know, what seems too good to be true, usually is.

Car dealerships see you as a one-and-done consumer.

Unlike financial institutions like banks and credit unions, car salesman are not interested in building long-lasting relationships. The "$0 down payment" deal may look good on the surface but the tiny text of your dealership loan may include harsh fees and a higher interest rate. Another common approach by car salesman is to lump in unwanted extended warranties, insurance products, and other items with the dealer financing cost. 

This together equals a higher monthly loan payment and more costs over the lifetime of your auto loan. 

Financial institutions are required to be transparent about lending costs and conditions.

The goal of most credit unions is to not only get your business but provide educational resources and guidance about your auto loan and car buying experience. By financing your car through a credit union, you will typically receive a lower interest rate with a term that works best for your financial situation. Unlike the car salesman, your credit union won't treat you as a one-and-done deal. They hope to gain a longer-standing relationship. Sounds like a win-win!

Speaking of relationships, by financing through a credit union, you will know exactly who to contact if any questions come up during the life of your car loan. Dealerships tend to work with 3rd party lenders who only want one thing: your monthly payment. Here's where an example of costly fees comes in. Say you happen to accidentally miss a payment... these lending companies have a reputation of being far less forgiving and may slap you with a high-cost late fee. 

Here's exactly how much you can save with a lower rate auto loan.

Let's do a quick calculation. If a credit union's interest rate for a 60 month auto loan for $25,000 is .5% lower than the dealerships,° you will save $337.11 in total interest over the course of your loan.

Let's try one more comparison... if you have a good credit score, you may be able to get a 60 month, $25,000 loan from your credit for 1.00% lower than the dealership.ºº In this case, you'd save $671.64. 

Use our Car Loan Comparison Calculator to compare the details of two loans >

° In this loan comparison example, we used 3.49% and 3.99%. °° In this loan comparison example, we used 2.99% and 3.99%.

Getting pre-approved before you shop is a smart move. 

First, what exactly is a car loan pre-approval? Many credit unions offer a quote or conditional commitment letter (known as a pre-approval) for borrowers who qualify for certain loan terms. This allows buyers to focus on finding the right car that fits their budget. A car loan pre-approval lets you know exactly what you can afford and gives you negotiating power since you know what your interest rate and the term are already. Not only will a car loan pre-approval save you money, but it also makes the car buying experience less stressful.

Get Started on a Pre-Approval

Have you recently financed your car at a dealership? A refinance may be right for you.

Here's a scenario: your car breaks down on the way home from work. After taking it to the shop you find out the cost of the repair is as much as your vehicle. You need to get to work in the morning so you make the split-second decision to visit the nearest car dealership to buy a new vehicle that evening. Dealership financing and all.

Whether this scene sounds familiar or not, if you financed your car at the dealership you may be able to save money each month by refinancing your auto loan. Refinancing your auto loan means paying off an existing loan from one lender with funds from a different lender, usually with a better interest rate and conditions. Since car dealerships tend to offer higher interest loan rates, it may be worth your time to review current rates at a credit union. Also, if your credit score has recently improved, it will be easier to get a better rate.

Check out the 4 Benefits of Refinancing a Car Loan >

The Takeaway Image of Carly the cat

Ignore pushy dealership tactics and take your time exploring your vehicle financing options before heading to the car lot. Chances are, your local credit union can get you a better deal on your next auto loan. Financial institutions are transparent in their lending operations. By getting pre-approved for your auto loan before visiting the dealership, you are preparing to shop with a rate and term in mind. Plus, you're less likely to avoid costly fees down the road.

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