How Does Auto Financing Work?


Quick Answer

Auto financing works through direct lending, in which a buyer gets a loan from a bank or credit union, and through dealership financing, in which a buyer works with the dealership to get financing, explains the Federal Trade Commission. Dealership financing tends to be more convenient and has more options.

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Full Answer

Advantages of direct lending include the fact the buyer can comparison shop by getting estimates from various finance companies, banks and credit unions, according to the FTC. Pre-approval also helps a buyer know approximately how much money he realistically qualifies for and helps him narrow down vehicle choices. The buyer contracts with the bank to pay a finance charge and pay back the loan in installments.

With dealership financing, the dealership initiates the loan contract but usually ends up selling it to a bank, credit union or finance company, states the FTC. It is to that company the buyer makes his payments. The buyer pays a finance charge and agreed-on installments for the life of the loan. A dealership sometimes offers reduced finance rates or cash-back payments. A buyer might not qualify for them if the auto he wants is not eligible or if his credit history is insufficient. The incentive programs also might require larger down payments or shorter loan terms.

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