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Credit Union vs. Dealer Financing: Which One is Best?

Searching for a new or used car in today's market can be really frustrating. Inventory is low, prices are high, and dealerships don't always have your best interests in mind. You just want an affordable monthly payment on a car you'll love.

However, dealers are increasingly pushing buyers towards their own financing for bigger profits. They may even seem reluctant to accept a pre-approval from your credit union. This dealer pressure often forces buyers to accept less-than-ideal loan terms.

While dealership financing can offer certain benefits, you need the complete picture to make an informed decision. Read on to discover the pros and cons of financing a car through a dealership.

Dealers Make More Money When They Finance the Loan

Understanding how dealer financing works can help you determine the best way to finance a car to fit your budget. Researching current rates offered by multiple lenders helps you find the best financing.

For example, auto dealers earn additional profits when they finance your loan through specific lenders they work with. They may even receive incentives to send the loans through their financing partners.

Dealership financing provides approval that allows them to earn money. They frequently raise the approved interest rate before presenting financing offers to customers.

For example, if their lender approves you for a 2.99% interest rate, the dealer might offer you a rate of 3.99% instead. If you accept it, the dealer pockets the extra profit from that 1%. That’s a great deal for them - but not so good for you!

What to Take Into Account When Considering Financing with a Dealer

Everyone knows financing through dealerships can be tricky, especially with many choices, rates, and additional features. But how much time do buyers spend researching their dealership financing options?

Most people want great rates on their car loans. However, very few borrowers try to look past dealerships' inflated rates, 0% financing offers, and negotiation tactics. Do these financing choices offer the best "return on investment" for your money, lifestyle, and budget?

Financing through Dealers: 3 Things Buyers Need to Know

Financing your vehicle through a dealership is not necessarily a bad thing. You may discover that dealership services provide many things private sellers do not. However, some circumstances occur behind closed consultation doors that can either make or break your dealership financing experience.

Whether it's better to finance through a dealer or your financial institution ultimately comes down to individual needs and priorities. Dealer financing may be more convenient since they can complete it on-site. However, banks and credit unions typically offer more competitive rates since they aim to provide value for their members and also complete the financing remotely and conveniently.

Here are three vital things you need to know about financing a vehicle through the dealership.

1. Beware of 0% Financing

For the most part, auto dealers assume you want to finance through their company. They are usually willing to negotiate prices, benefits, and some features with the intention of ‘hooking’ you into a great deal. Of course, dealers make most of their money from loan interest car payments. Added fees or heightened interest rates are in their best interests.

So why is it important to be wary about 0% financing?

The sad and disappointing truth is that added interest costs and upgrade fees are already "built-in" to a loan with 0% financing. Instead of selling you a $24,000 car with 3.0% interest, dealers will offer a $27,000 car with 0% interest.

Financing a 0% loan through a dealership may cost more than a loan from a local credit union. For example, Best Reward Federal Credit Union often offers better value financing than 0% dealer loans. That’s even with a higher interest rate!

Unfortunately, 0% financing sounds much better on paper than in the real world. Be sure to evaluate your current financial standing accurately to determine if 0% financing loans are right for you.

2. Check for Inflated Rates

Auto dealers commonly use inflated rates as a financing tactic. During financing discussions, some dealers may quote interest rates far above a customer's pre-approval rate. Of course, this means you are paying much more for something that costs much less.

For example, if a dealership offers you a loan with a 5.5% interest rate, do not immediately close the deal. You may have been approved at 4.00% without even knowing it!

It's wise to shop around and compare loans from multiple lenders. Take the time to ask each one for the loan's APR and interest rate. This will allow you to compare APRs (including additional fees) against one another.

3. Be Willing to Negotiate

Negotiation is one of the fine arts of financing. However, most borrowers steer clear of the process for fear of rejection or embarrassment.

Negotiations begin with asking many questions. Be sure to ask your dealer what the interest rate would be if converted to APR or vice versa. You should ask about hidden fees, closing costs, and other details. This will give you a better idea of the total cost of financing through a particular dealer.

Sometimes, the best negotiation is not in what you say but in what you don’t. Buyers can consider silence one of the most powerful negotiation points. You have a better chance of securing your preferred financing terms by deflecting unwanted answers and "voicing" your opinions.

You can walk away if a dealer refuses to lower prices, negotiate terms, or disclose financing costs. Shopping elsewhere under your preferred terms and finding a better deal is possible.

Why 0% APR Offers May Not Be the Best Option

Dealers often advertise 0% financing for well-qualified borrowers. Most credit unions offer low rates, but rarely 0%.

When shopping with a credit union pre-approval, ask if a dealer encourages applying for their 0% financing offer. It is worth understanding the dealer's offer. Remember that not everyone will qualify for 0% financing. The dealer must check your credit to determine the interest rate you qualify for.

Dealers and their lenders are businesses. As such, they need to profit from loans, not give away money. Lenders often include frequent fees and hidden charges in loans with 0% offers. This can increase monthly payments above a low-interest loan offered without fees.

Click to see an example and how to compare 0% financing offers.

Can a Dealership Refuse Outside Financing?

Some people who shop for cars with pre-approved loans are surprised when dealers refuse their financing. Dealers can decline auto loans pre-approved by credit unions and other lenders.

But can a dealership deny outside financing? Let’s look at what’s driving this trend and consider why car dealers want you to finance through them.

Buyers Required to Use Dealer-Arranged Financing

More and more credit unions report car dealerships turning down buyers with pre-approved auto financing. Instead, the dealers insist the buyers accept financing through a dealer-approved lender.

Some dealers have declined to accept certain forms of pre-approved financing from credit unions. Recent reports indicate several dealers have turned down letters of credit and cashier's checks from buyers with loan approval from their local credit union.

“We have been seeing this happening for a few years now, and members get totally frustrated when shopping for a vehicle,” one credit union loan officer reported. “It’s not right that our members cannot finance through the financial institution that they have a good relationship with and trust.”

Some dealers decline to accept financing from outside sources like credit unions. As a result, many car buyers question whether it's best to finance a purchase through a dealer, bank, or credit union.

Dealers often recommend their own financing to earn larger profits. However, getting pre-approval from your credit union or bank can provide more control. It also allows for better interest rates on an auto loan.

The Problem

A major shortage of new and used cars has occurred over the last 2-3 years. This shortage has given auto dealers strong negotiating power when setting terms of sale. Due to the shortage of new and used cars, dealers can demand higher prices.

This gives dealers the power to set the terms of the sale. They can determine how customers choose to finance their purchases. At the same time, dealers need to make their profits from fewer vehicles.

Dealerships have other reasons to have you finance your vehicle through their preferred lenders. Car salespeople may offer a considerable discount on the sticker price. They can also promise a low monthly payment. Both are common negotiation tactics because:

Car dealerships can make up the difference in other ways. They may charge higher interest rates or offer longer loan terms than the buyer prefers. Auto financing lenders often pay bonuses to dealerships to compete for loans.

Dealerships do not have to accept financing from outside lenders. Many feel comfortable denying pre-approved auto loans from credit unions. This has frustrated many credit union members and employees.

“Some dealers have taken it to the point in which they will tell our members they won’t accept cash!” an auto financing specialist at another credit union said. “Letters of credit are almost becoming obsolete because more and more dealers won’t accept them.”

What Can You Do About it?

Dealers now hold an advantage when deciding whether to accept outside loans. However, buyers can take action to obtain their preferred financing.

Come Prepared

Research the rates and terms offered by several lenders and compare them with those advertised by dealerships. Discuss your plans with your credit union. Ideally, you should be pre-approved for financing when you step onto the showroom floor.

Walk Away

A powerful weapon in any car negotiation is your ability to walk away if a dealer refuses your outside financing. A dealer may want to finance the vehicle you want. This is because they can earn substantial profits from financing arrangements. Remember this even if you have your heart set on a particular car.

Know Your Refinancing Options

Carefully review refinancing options if you can’t avoid a dealer loan. Consider refinancing the auto loan through your credit union or other lender as soon as possible.

Talk to your preferred lender about the rates and conditions under which they can refinance a particular vehicle. Many credit unions offer flexible auto refinancing terms.

Determine whether your dealer financing includes prepayment penalties for refinancing or paying off the loan. Lenders often reward dealers with bonuses if the dealers secure financing on a vehicle for a minimum period.

Why Credit Union Pre-Approvals Work For You

The unique structure of credit unions, like Best Reward Federal Credit Union, allows them to offer their members many financial benefits, including:

Competitive Rates – No need to wait for “dealer specials” as credit unions offer great rates and benefits year-round. We provide options for those with excellent credit and those rebuilding bad credit. Our auto loans enable members to find affordable monthly payments that fit their budget over the life of the loan.

Affordable Payments – With various loan terms, credit unions work with you to fit your payment within your budget.

Easy Pre-Approvals – Many credit unions provide convenient online loan applications. They also allow quick pre-approvals. This prepares buyers before they visit a dealership.

Save on Fees – At Best Reward FCU, you can enjoy no application fees, processing fees, or pre-payment penalties

Available Extras – We offer extras like payment protection, GAP coverage, and auto insurance. These services protect the vehicle at an affordable cost.

At Best Reward FCU, we do not pressure members into decisions about extras during the auto loan signing. If you want to add any extras later, we can work with you to do so. Our staff can help evaluate which coverage options best suit a specific vehicle and an individual's finances.

Sign Documents Wherever You Are – Best Reward FCU uses e-Sign powered by DocuSign. This tool allows customers to access and electronically sign loan documents from anywhere at any time, including nights and weekends.

Financed Elsewhere – Refinance with us, and we may be able to lower your rate or monthly payment.


Member ownership sets Best Reward Federal Credit Union apart from other financial institutions. We do not have profit targets or expectations to meet shareholders. As such, we’re well-positioned to help you secure car financing that meets your needs instead of the dealer’s.

Talk to us about your car ownership plans. We offer:

Pre-approval from Best Reward FCU assists in negotiations with dealerships. Members can specify their preferred lender and pursue other options if a dealership declines to cooperate.

We can also assist in discussions with dealers to obtain the best possible deal. If dealer financing is necessary for a car purchase, we provide refinancing options that may offer improved terms.

Click below to see the value you’ll get from financing your next car through Best Reward Federal Credit Union!

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