Bank or Dealer: Which is Best for Pre-Owned Car Financing?

Published on November 3, 2022 in Features and Tips by The Car Guide

A large proportion of people can’t afford to pay cash when buying a used vehicle. As a matter of fact, most have to resort to financing - especially when the price is high.  

Generally, you can get a loan from a financial institution or a car dealership. Of course, each option has its pros and cons. The one you choose can depend on several factors, your credit score for example.

Variable or Fixed Rate

In the current high interest rate climate, consumers need to be careful. Selecting the institution with the lowest rate is more important than ever, so doing your research is imperative! Banks and dealerships have different terms depending on the year, make and model of the vehicle.  

Also, the type of rate will have a major impact on your payments. A fixed rate will stay the same, no matter how many years you need to repay your loan. Conversely, a variable rate will fluctuate according to the market, which is a big bet to take.

Our advice: choose a certified pre-owned vehicle. They generally have lower interest rates and have gone through rigorous safety inspections, in addition to coming with privileges and better guarantees.

Financing Through a Bank

“If you’ve been with the same financial institution for several years, you’ve probably established a good relationship with them. You can go there at any time of the day, discuss your situation with an advisor and get financial tips more easily than with a car dealer, says Caitlin Wood from Loans Canada. Your bank will probably be more lenient if you miss a payment, especially if you have a good record.”

Wood adds that most banks are also open to negotiation regarding the payment period, because they want to keep their customers. For example, if you want to repay your loan faster by making payments every two weeks instead of once a month, your bank probably won't mind.

But be aware that financial institutions have stricter rules than car dealers regarding the approval process. Among other things, the borrower must have a good credit score before getting a car loan, even if it’s for a pre-owned car.

In addition, since the approval can take several business days, don’t expect to receive your loan right away, but there’s a solution: getting a pre-approval will save you some time when finalising the sale.

Financing Through the Dealer

The other option is of course to get financing from the dealer for the pre-owned vehicle you want to buy. The main advantage here is the convenience: the application and approval processes are faster and allow you to leave with your new vehicle the same day, most of the time.

“Even though not all dealers offer better interest rates than banks, they are likely to negotiate to close the sale, explains Caitlin Wood. They can even offer bonuses like an extended warranty to make the deal more attractive. Since they are trying to move their inventory, car dealers are more inclined than banks to finance used vehicles and help drivers with bad credit.”

In fact, if you've missed payments or filed for bankruptcy in the past, it will be much easier to get second or third chance credit with a dealership than with a financial institution.

In short, your car financing options will vary according to your financial situation. It’s important to discuss the matter thoroughly with the lender and read the fine print on the contract before signing it. After all, this is an investment that could cost you dearly in the long run.  

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