If you're searching for a new or used car, chances are good that you're planning on financing. The vast majority of new cars are financed, as the majority of drivers can't afford -- or don't want -- to pay for a new vehicle with cash. But before you sign the papers at the dealership, you might want to consider if you can get better interest rates and lower your payment by financing your next car through a bank or credit union.

Who Offers a Lower Rate?

As a rule, there's no telling whether the dealer will beat your bank's rate, or vice versa. Remember: In most cases, dealer financing is also bank financing; the dealer is just doing the legwork by going to the bank on your behalf. So there's no magic answer to the question of which one will have lower rates. That said, there are some pros and cons to choosing a dealer, and other pros and cons to choosing a bank. We've listed them to help you make the best decision possible.

Dealer Financing: The Best Choice?

Many shoppers avoid the bank and just go through the dealer. It's easier: They can show up, finance the car and drive away -- all in the same day. But easier isn't always better. After all, the dealer's rates are marked up from the bank's rates, and they have to be for the dealer to make any money. That means they may be higher. And since dealers send business to banks across the country, being late on a payment may mean talking to a bank located across the country -- and they may not be willing to work with you, as your local bank might.

But there are some benefits to dealer financing. One is that automakers sometimes offer very low rates -- including 0 percent -- as part of a promotion. While that's usually only true on new cars, it's a rate that your bank won't match. Dealers also shop your credit profile around to several banks. That means some offers may be lower than others -- even lower than your bank's.

Benefits of Your Bank

The bank holds a few benefits over the dealer. One is that the bank is nearby and you have a relationship. That means you have a better chance of getting the bank to work with you if you fall behind in your payments. That's especially true if you finance through a small credit union or a local bank.

The bank's main advantage is that it doesn't mark up its interest rates. Since you're dealing directly with the lender, there's no middleman -- the dealer -- and the rates are likely to be better.

But the bank does suffer from a few disadvantages. In many cases, dealer quotes on interest rates are negotiable. That's not true at the bank, where their final offer is almost always the best one. Your bank also won't shop your credit profile around to different lenders -- they'll only have one offer to give you.

Our Suggestion

If you're looking for your car, try this: Go to your bank first and see what their offer will be. Then visit the dealer. If they can match the bank's rate, that's great. If not, stick with the bank. Either way, you'll have a great bargaining chip as you negotiate the car's price.

author photo

Doug DeMuro has a wide range of automotive industry experience, from work at a Ferrari dealership to a manager for Porsche North America. A lifelong car enthusiast, Doug's eclectic vehicle purchases include a Porsche 911 Turbo, an E63 AMG wagon, an old Range Rover and a Mercedes Benz G-wagen.

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