Getting a car in 2021 is no longer a thing of worry. If you are buying a car by taking a loan, you can go to your bank or get it financed through a dealership. Fairly easy, right? Well, there are some differences between both options, and these can often confuse most people.
It is also important to understand that the differences are a lot less than you might initially think when comparing both options. In most cases, it all depends on the situation you are in. It is also vital to know that choosing the right option can potentially save you time, and in some cases, money, as well.
So, are you confused about whether to finance your new car through a bank or a dealership? Don’t worry! We’re here to help you make the right decision.
Financing a Car Through a Bank
The first option you have is to go to the bank for financing options. If you get approved for a bank loan, the bank or credit union will give you a quote along with a letter of commitment that you can present to the dealer.
The benefit of having a predetermined loan amount is that dealers won’t pressure you to get additional expensive add-ons that you might not need since they know you don’t have the money for it.
Based on the bank or the credit union, pre-approval applications can be filed online and at local bank branches. You will also need to provide some information about the vehicle, such as the vehicle type, make, model, and whether it is new or used.
The rate that the bank is going to offer you will be based on a true interest rate. It will not have any markup. This rate will not be the final offer in theory since things can change before your car loan is approved.
Banks in the UAE offer very competitive rates for auto loans. For example, FAB bank provides many auto loan schemes, which you can check here, at competitive rates of just 1.99% for locals and 2.15% for ex-pats!
Financing a Car Through the Dealership
Financing a car through a dealership is similar to how it is done by the bank. The difference here is that the dealership is going to do all the work for you.
Once you are done choosing the car, the dealership will fill out a credit application which will be sent to several lenders. This gives you the benefit of getting to compare multiple rates and terms so you can choose the best option.
However, be careful. In some cases, dealers can end up giving you a higher interest rate than what the lenders have offered just to take a commission for handling all the financing paperwork.
Dealership vs Bank: Which One To Choose?
Ultimately, we would recommend choosing a bank. There are a few reasons why a bank is a smart choice for your auto loan.
Firstly, banks are under no pressure to sell you a car like dealerships are. Buying a car is a big financial decision and banks are an objective third party that will look at your credit history and salary to determine whether a new car is something you can afford.
On the other hand, dealerships are incentivized to sell you the car because it benefits them directly. So they’ll try to offer you terms that look favorable, like low monthly payments, to get you to buy the car. In reality, you’ll probably end up paying a lot more in interest.
This brings us to our other point; dealerships tend to offer high-interest rates. We’ve already talked about this before but let’s add a bit more detail. Dealerships look for auto loans suitable to you but can also add a markup on interest to earn from your auto loan.
So, if a loan has an interest rate of 4%, a dealership can offer it to you for 6% and earn from the extra 2% interest you’re paying.
However, there may be times when choosing a dealership loan is more cost-effective.
Some dealerships offer 0% APR. If you qualify for this financing option, it’ll be the cheapest auto loan you can find.
In addition to this, if you have a bad credit score, you may struggle to even get an auto loan from a bank. Some banks may approve you for one, but you are a high-risk borrower at high interest rates. Getting approved for a loan through a dealership may be easier in this case.
A lot of dealerships tend to have departments dedicated to customers with low credit scores. These departments may help you secure a loan despite your credit score.
Other dealerships may also offer ‘in-house’ financing. However, be careful here. These loans are offered directly from the dealerships and not a credit facility, such as a bank.
So, you’ll be borrowing directly from the dealership, which is always risky and expensive.
Not borrowing from a credit facility is also less secure since your lender isn’t bound by an official set of rules.
Choosing the right option to finance a car can be tricky. In most cases, people spend months researching before they make a final decision. Ideally, you would want to go for a way that will save you the most amount of money, but that is not evident from the get-go.
The best advice we can give you is to get a preapproved loan from a bank before going to dealerships. You can then ask dealerships to give you a quote as well. That way, you will be able to compare your options and make the best decision for yourself.
Some dealerships may offer a pre approval process themselves, but this binds you to buy from their dealership. Comparatively, a bank pre approval can be used in any dealership.