3 Reasons to Avoid Dealership Financing

Dealership financing is generally an option when you purchase a new vehicle. The financing may be provided through an auto manufacturer's financing arm, such as the Nissan Motor Acceptance Corporation or General Motors Acceptance Corporation, or through a private dealer's financial company. In either case, you will be purchasing your vehicle from the same person lending you the money for the purchase. This streamlined option is often the fastest way to get a loan and comes with low interest rates. However, there are many problems that arise with dealership financing as well.

#1 Bad Loan Terms

Dealership financing often has a shorter application process and looser loan standards than bank or traditional financiers. As a result, the dealer extends riskier loans to a wider variety of people. Not all of these borrowers repay the loans; dealerships tend to have a higher rate of default on their loans than banks do. To spread out the risk and compensate for these losses, dealers assign less favorable loan terms to borrowers. For example, there are very high prepayment fees for paying off a loan early. You may also find it more difficult to refinance or modify the loan in any way. Even adding a second person to your application or adding a second lien holder in the future can be precluded in your loan contract. Read over the terms very carefully to prevent unforeseen penalties in the future.

#2 Tied to Collateral

Most car loans use collateral as a means of securing the loan. Even if you finance through a bank, the bank will typically ask that you place the vehicle as collateral in case of default. While most lenders ask for this security, your car dealership holds a greater control over your collateral than another lender would. The dealer holds on to the car title until you pay off the loan. Dealers are notorious for simply showing up and seizing an asset without notifying you by mail or phone first. This is part of the loan terms you sign with a dealer, another reason to check the contract closely. You will generally find you have less ownership rights for your vehicle with a dealer loan than with a bank loan.

#3 Lack of Flexibility

For the reasons mentioned above, a dealer loan is generally less flexible than a bank loan. There are other reasons making these loans less flexible as well. For example, it is possible to take a personal loan from a bank to cover the cost of purchasing your vehicle. In addition to covering the purchase cost, you may seek an additional amount of funds in the same loan contract to provide for any expenses you may wish to cover through the single loan. Some individuals will use a personal loan to make both the down payment on the car and to finance the purchase of the vehicle. Others will use the extra funds to elect upgrades on the car. With a dealer, your loan is extended only in the amount that is listed on the sticker price for the vehicle.