Bank or dealership: which is better for financing a used car?

A large portion of people cannot afford to pay cash when buying a used vehicle. In fact, most have to resort to financing, especially when the price is high.

Generally, you can obtain a loan from a financial institution or a car dealership. Of course, each option has its pros and cons. Which one you choose may depend on several factors, such as your credit score.

Variable or fixed rate

In today’s high interest rate climate, consumers need to be cautious. Selecting the establishment with the lowest rate is more important than ever, so doing your research is imperative! Banks and dealerships have different terms depending on the year, make and model of the vehicle.

Additionally, the type of rate will have a major impact on your payments. A fixed rate will stay the same no matter how many years you need to pay off your loan. Conversely, a variable rate will fluctuate with the market, which is a big gamble to take.

Our advice: choose a certified used vehicle. They generally have lower interest rates and have passed rigorous security inspections, in addition to benefiting from privileges and better guarantees.

Financing through a bank

“If you’ve been with the same financial institution for several years, you’ve probably established a good relationship with them. You can go there at any time of the day, discuss your situation with an advisor and get financial advice more easily than at a car dealership, says Caitlin Wood of Loans Canada. Your bank will likely be more lenient if you miss a payment, especially if you have a good record.

Wood adds that most banks are also open to negotiation regarding the payment term, as they want to retain their customers. For example, if you want to pay off your loan faster by making payments every two weeks instead of once a month, your bank probably won’t care.

But be aware that financial institutions have stricter rules than car dealerships regarding the approval process. Among other things, the borrower must have a good credit rating before obtaining an auto loan, even if it is a used car.

Also, since approval can take several business days, don’t expect to receive your loan right away, but there is a solution: getting pre-approved will save you time when finalizing the sale.

Dealer Financing

The other option is of course to obtain financing from the dealership for the used vehicle you wish to purchase. The main advantage here is convenience: the application and approval processes are faster and you can drive away with your new vehicle the same day, most of the time.

“While not all dealerships offer better interest rates than banks, they are likely to negotiate to close the sale,” explains Caitlin Wood. They may even offer bonuses like an extended warranty to make the deal more attractive. Because they’re trying to move their inventory, auto dealerships are more likely than banks to finance used vehicles and help drivers with bad credit.

Indeed, if you have missed payments or gone bankrupt in the past, it will be much easier to obtain a second or third chance at credit from a dealership than from a financial institution.

In short, your car financing options will vary depending on your financial situation. It is important to discuss the matter thoroughly with the lender and to read the fine print of the contract before signing it. After all, it’s an investment that could cost you in the long run.

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