Is it Better to Get an Online Car Loan or Financing Through the Dealership?

Written by Kim PinnelliUpdated: 29th Mar 2022
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Buying a car is exciting, but you need the financing to do it. Auto dealer financing and online car loans are your two options if you only have a down payment and need financing to buy the car. Which is right for you, and how do they work?

Read on to learn more.

Online Auto Loans vs. Dealership Financing: The Differences that Matter

Online auto loans are much different than dealership financing. It’s important to understand the differences so you compare your options and choose the right one for you.

Understanding Online Auto Loans

Online auto loans are loans you get from an online bank or lender. It’s separate from the dealership, and it makes you a ‘cash buyer’ as far as the dealer is concerned because you have the financing already, and they can’t work out a deal with you.

Here’s what you must know about online auto loans.

>> More: See the Best Auto Loan Rates

Rates and Terms

Banks have only a certain number of loan programs to offer you. Their rates and terms are usually pretty attractive, though, and you don’t have to worry about dealership markup to make a profit. You can usually secure a loan for 2 to 7 years and get low-interest rates if you have good credit. However, it might be hard to get approved with an online auto lender if you have subpar credit.

>> More: How to Get a Car Loan

Qualifying Requirements

The qualifying requirements to get an online car loan aren’t strict, but you’ll want to provide as many good factors as you can, including:

  • Good credit – It doesn’t have to be perfect, but aim for a 660 or higher for the best options
  • Stable income – You must be able to prove you can afford the loan by providing your paystubs, W-2s, or tax returns
  • Down payment – You don’t need a specific amount of money to put down on the car, but any amount can help your approval rates
  • Proof of residency – You can prove your residency with your driver’s license, a utility bill, or state-issued mail

Total Loan Amounts

The amount of money a lender will lend you depends on your qualifying factors and the car you are buying. The average cost of a new car is a whopping $47,000, so loan amounts can get high, but it depends on the amount of your down payment and what you can afford. Often, they can’t finalize their offer until they know what you plan to buy. They won’t lend you more than the car’s value, so try to know what you want to buy before applying for financing.

Funding Times

Funding from an online lender can take as much as 1 to 4 business days AFTER approval. Getting approved could take a day or two, depending on how much information they need and how fast you supply it.

Understanding Dealership Financing

As the name suggests, Dealership financing is financing you secure from the dealer. It’s fast and convenient, but it’s not always the best deal. If you have bad credit or other factors that make banks turn you down, dealership financing may be your best bet because dealerships often work with many banks and lenders, so they may have more options.

Rates and Terms

The rates on dealership financing can be higher than the rates of online lender financing because dealer’s markup the rates to make a profit for their part in the process. The terms are pretty much the same as online lenders since most dealers have loan options for 2 to 7 years.

>> More: 5+ Reasons to Avoid Auto Dealership Financing

Qualifying Requirements

Dealership financing has the same requirements as online lenders if you want the best rates and terms, especially if you’re trying to qualify for 0% financing from the manufacturer. You’ll need great credit and plenty of income to cover the payment plus your existing debts.

If you have bad or fair credit or have income issues, you might be better off with dealer financing because of the many options they have. You’ll have a better chance of getting financing, but it may come at a price.

Total Loan Amounts

Like online lenders, the bank dealers work with can only lend you as much as the car’s price minus any required down payment. Some banks don’t require a down payment with dealer financing, but you may need money for tax, title, and license.

Funding Times

Dealer financing is instant. You don’t have to wait days to get approved for a car loan and another few days to receive the funds. You can finalize the entire deal from picking out your car, negotiating the price, and financing it within a few hours if everything goes well.

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Pros and Cons of Online Auto Loans

Pros:

  • You often get lower rates because no intermediary is marking it up
  • You can be a ‘cash buyer’ if you already have your loan approval when you shop for a car
  • You’ll avoid up-selling pressure from the dealer because you won’t have the room in your loan to pay for it

Cons:

  • Online lenders don’t have the luxury of offering a 0% APR like manufacturer financing offers
  • The qualifying requirements can be tough to meet for some

Pros and Cons of Dealership Financing

Pros:

  • You can get financed the same day you pick out your car, driving off the lot with your new car in hours
  • You might get lucky enough to get 0% APR financing
  • There are more options if you have bad credit

Cons:

  • Your rates might be inflated to cover the dealerships profit
  • Dealerships can easily persuade you to upgrade your features which means they increase your loan amount and payment

Frequently Asked Questions

When Does Using an Online Car Loan Make Sense?

If you have good credit, know what car you want, and there isn’t 0% APR financing available for the make and model you’re buying, look at online car loans. You can get pre-approved and walk into the dealership with the cash in hand so that you are a cash buyer and have more room for negotiations to go your way.

When Does Using Auto Dealer Financing Make Sense?

Dealer financing makes sense when you’re in a hurry and need the convenience of same-day financing or when you have a unique financial situation and can’t get approved by a bank. Dealerships often have more options to help you get the loan you need.

Is It Better to Get an Auto Loan Online or In-Person?

It’s not whether you get your auto loan online or in person; instead, it’s about the deal you get. Look at the payment, interest, and overall loan cost. Which loan has the best terms and will cost you the least in the long run? That’s the best way to get an auto loan.

Is Direct Lending or Dealer Financing Better?

Dealer financing can be better when you have a unique situation that a direct lender won’t touch. If you have good credit and straightforward income, direct lending is the best way to go. You’ll get the lowest interest rates and best terms.

Is It Easier to Qualify for an Online Auto Loan or Get Dealer Financing?

Online auto loans and dealer financing are easy to get, depending on what you qualify for. An online auto loan is a breeze if you have great credit and income. Working with a dealer may be a better option if you have a unique circumstance because you can explain the issues in person and try to get financed.

What Is the Difference Between Getting a Loan from a Bank or an Auto Dealership?

The only difference in getting a loan from a bank or auto dealership is how you receive the funds. You’ll make a loan payment the same way with both loans, and you’ll pay interest on both loans. With a bank, though, you can get pre-approved ahead of time and know what you can afford, whereas when you do dealer financing, you find out after you’ve picked out the car what financing you can get.

Bottom Line: Online Car Loan vs. Auto Dealer Financing

Compare your options for financing and see which makes the most sense for you. In most cases, good credit borrowers do best with online car loans unless they can get 0% APR financing. It’s always good to check out your options and see which offers the lowest overall cost, as that should be your overall goal.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.