After determining the color, make and model you want for your future vehicle, you need to decide how you plan to buy it. And if you’re looking to finance a new car, you have several options.
One of these options is direct automatic financing, which is when you obtain financing directly from a lender. Although the process may vary by lender, consider the benefits before determining if direct financing is right for you.
What is auto direct financing?
Direct auto financing is a type of loan available from online lenders, banks, and credit unions. On the other hand, its counterpart, indirect financing, is available through car dealerships and loan connection services.
Direct financing is usually found outside of dealerships, which can be a drawback if you prefer a streamlined buying and financing process. Along with this, you may also struggle to find a lender that offers decent rates for no credit and low credit borrowers.
But dealer financing isn’t perfect either. Dealerships often have finance markups, which you can avoid when working directly with a lender.
Direct vs Indirect Automotive Financing
Although both finance options leave you satisfied and walk away with a new set of wheels, the process differs. So, depending on your situation, one may save you more than the other.
In the case of direct financing, you will work with a bank, credit union or online lender yourself. If you bought from a dealership, you still had to go to the dealership to choose your vehicle and sign the paperwork.
On the other hand, indirect funding means that you will have a guide throughout the process. While this facility may be attractive, the downside of going through a dealership is that they may mark up the interest rate. If you opt for dealer financing, be sure to present a pre-approval offer from an outside lender – you may be able to negotiate dealer rates down.
Another advantage of direct car financing is the ability to shop around and not be stuck with the options presented on the car lot. You can get quotes from multiple lenders and pick the best deal based on terms, rate, and other factors rather than just taking what’s right for you.
How auto direct financing works
The process of financing your car through a direct lender varies, but these basic steps will always apply.
1. Prequalify with multiple lenders
Prequalification is like seeking quotes from lenders. You can choose from offered rates, loan terms, and monthly payments, among other features. Compare the rates offered by several lenders to make sure you get the best deal.
2. Choose a lender and apply
Once you have prequalified with several lenders, you can choose the lender with the most favorable terms. You will likely need to provide proof of income, a social security number, and a bank account number for verification to prequalify for a loan.
The lender will determine how much loan they can provide based on your income, debt, employment, and other factors.
3. Buy the car
You can then go to the dealership or shop online. Since you already have financing, you can shop like a cash buyer.
4. Start making payments
You will need to start making payments as soon as possible. Often you can make these payments online, over the phone, or in some cases you can still make payments by mail.
Where to find a direct lender
When looking for a direct lender, it’s wise to start with institutions where you already have an account. If that’s not an option, check out other direct loan sources.
Check with your local bank or credit union
Many banks and credit unions offer direct auto loans, although they may have dealership requirements. If you have an account with that specific bank or credit union and you’re on good terms, you can get a decent rate even if your credit isn’t perfect.
There are many online lenders that offer direct auto financing, such as myAutoLoan or Capital One. Or even a one-stop-shop where you can buy and finance online, like Carvana. Often, you’ll be able to get financing the same day you apply, and you don’t necessarily need to choose a car, depending on the lender.
Captive finance companies
Captive finance companies are internal financing options available to automakers.
You can get vehicle leasing options and car loans for cars manufactured by their parent company. For example, GM Financial offers both options for vehicles manufactured by General Motors.
The bottom line
Financing your car through a dealership is one of the easiest ways to get financing for a new vehicle, but the financing option that’s right for you depends on your situation. For example, if you already have an account with a bank or credit union, you may qualify for a lower interest rate through direct auto financing.