Are you thinking about buying a new car? Well, you’re not alone. New car sales have topped the charts in recent years, with nearly 18 million annual car sales in the U.S. While a very small percentage of those buyers paid cash for their new rides, most of us rely on vehicle financing to get behind the wheel of a new car.
After all, coming up with $20,000-$30,000 or more is no easy task, and if it weren’t for vehicle financing, owning a new car would be out of reach for the vast majority of U.S. consumers.
Fortunately, there are plenty of vehicle financing programs available to buyers today. The difficult part is making sure you select the best option. For most people, that means deciding if it’s better to finance through your dealer or to explore outside financing options like credit unions.
Dealer Financing vs. Credit Unions
For lots of buyers, opting for dealer financing seems like the ideal choice: You’re at the dealership and you’re already signing papers, so why not add those financing papers to the mix?
It seems like an easy choice, and since dealers specialize in auto loans, the process should be pretty straightforward and have your interests as a buyer in mind, right? Plus some dealers or car manufacturers offer financing incentives that can sound pretty good, especially when you’re already stressed about the overall cost of the vehicle.
But just because something seems like the simplest option, that doesn’t mean it’s always the best. And considering you may be financing tens of thousands of dollars, taking some time to explore other financing options can mean thousands of dollars of savings over the life of a five- or six-year loan.
That means taking a little time to compare dealer financing with other options, like credit unions - and looking beyond interest rates and term lengths.
When looking for any type of loan, the first thing most people consider is the interest rate they’ll be paying. Often, dealers will advertise so-called “teaser” rates, very low interest rates that sound great, but which really are reserved for a very, very select few - typically people with the absolute highest credit scores and with very long credit histories.
Even then, there can be additional “hoops” to jump through that wind up disqualifying most loan applicants, including many with stellar credit. That means that if you opt for dealer financing, you won’t know the interest rate you’ll be charged (or any additional financing fees) until you’re sitting in front of the dealer with the paperwork just begging to be signed.
It’s that additional pressure that helps push through many car loans with less than attractive terms; after all, when you’re just about to buy that brand new car, it’s unlikely you’ll walk away because the interest rate seems a little high or if there are additional fees or terms that aren’t necessarily favorable to you.
Outside of the interest rate and additional financing fees that may be assessed by dealers, there’s another major issue with dealer financing that can be really troublesome if you’re hoping to pay off your vehicle loan early:
Because most credit union and bank loans assess interest along with your principal with each payment you make, paying off your loan early means you can save a lot of money in interest payments. But in car loans, it often works differently. Many dealers use something called precomputed interest, which means your interest is added into the cost of your loan right from the start. That means if you want to pay off your loan early, you’ll have to pay the entire amount of interest you’d need to pay if you kept the loan for the entire amount of time.
For instance, if you pay off a six-year loan in just three years, you’ll still need to pay six years worth of interest since it’s already computed into the total cost of your loan. Precomputed interest is one way car manufacturers and dealers make more money on the loans they write, and unless you’re used to reading financial documents, it’s easy to overlook this very critical difference that can have a major impact on your bottom line.
The Benefits of Credit Union Financing
One of the biggest advantages of financing through a credit union is that, while dealer financing is focused on helping the dealership and auto manufacturer make money, credit unions exist to serve the needs of their members. In fact, credit unions are actually owned by the members who use them.
That means you can feel confident the loan you take out is written in your best interests, whether you plan to pay your loan off early or carry it through to the end of the loan term. By contrast, dealer and manufacturer financing programs often offer closing bonuses and other financial incentives to the dealerships and the individual dealers. That means the more loans the dealer closes - and the more money they make for the lender - the more money they can also make for themselves.
As a result, a dealer may be pushing for higher loan amounts or rates, simply because it winds up making them some extra cash, or they may use high-pressure tactics to convince you their product is superior to a credit union loan.
Credit unions are also more likely to work with buyers who have less-than-perfect credit, including buyers who may have a history of missed or late payments (which includes lots and lots of people). Not only will they make loans available to people with lower credit scores, but the rates they offer tend to be more competitive - again, because the credit union is in business to help its members succeed financially.
Most credit unions have their roots in your local community, so when you take a loan from a credit union, they’re more likely to understand your needs and your concerns. It’s also a great way to invest in your own local community.
Plus, credit unions have a long history of making loans available when other banks have been more cautious. For instance, during the financial crisis of 2009 when banks were pulling back on loans and dramatically increasing their lending requirements, credit unions were still working for their members, supplying more than $80 billion for low-cost car loans during 2009 alone.
Credit Union Myths
If credit union financing is so favorable, why don’t more people opt for it when buying a new vehicle? One of the simplest reasons: Most people don’t really understand what credit unions are or how they “work.”
In fact, many people think credit unions are only for employees of specific companies or members of certain groups like the military. For many, the word “union” implies they need to meet stringent criteria in order to qualify for loans and other banking products.
While some credit unions may have certain guidelines or requirements you’ll need to meet before you can apply for loans, the majority of credit unions are open to all, which means you could join a credit union today and start enjoying the benefits of membership right away.
Another common misconception about credit unions is that they simply don’t provide the same products or the most competitive rates compared to other loan options - but again, that’s just not true. Credit unions offer auto loans that are just as attractive as dealer financing, and often more attractive, including lower-interest loans and loans with six-year terms, just like dealer financing.
Credit Union or Dealer Financing: Which Is Right for You?
Unfortunately, there’s no simple, immediate answer to that question; you need to do a little financial detective work. If you’re applying for financing through an auto manufacturer, you can visit their website to read as much as you can about their financing program.
You might even be able to contact them ahead of time to ask about whether or not they use precomputed interest when writing loan products. You might also be able to read the fine print regarding their financing offers to learn what sorts of financial hoops you need to jump through in order to possibly qualify.
For credit unions, it’s a lot simpler. Credit unions post their loan rates on their websites, and you can always call the credit union to talk directly to a loan agent. Plus, you can typically apply for a loan offer right online, and you can read all about the loan rate and terms so you can feel completely confident about the loan you’re agreeing to.
Another benefit: Since your credit union is working for you, they can provide lots of helpful tips on car buying and explain any terms or loan criteria to make the application process as simple and hassle-free as possible.
In the end, only you can decide which type of vehicle financing is best for your needs. Just be sure to take your time to compare all your options so you don’t wind up with a product that’s not ideal for you.
To learn more about getting credit union financing for your car purchase, visit our vehicle loan page; you’ll see the offers, terms and different options for your loan. You can even apply for a loan online.