Auto Dealers vs. Credit Unions. What's the Difference?

When taking out an auto loan, most people traditionally go through their dealership. After hours of negotiation, the dealer and buyer finally settle on a term they’re happy with, and the buyer walks out with a brand-new car. Before going this route, it is good to be educated on all of the options you have on financing your new car. There are some key differences between financing through a credit union and financing through a dealership that you should be aware of before buying your next car.


Financing through a car dealership:

1. You will typically pay a higher interest rate than what the lender quoted. When financing through an auto-dealership, the dealer will send your information to their lenders. If a lender accepts the loan, they will send back a quote to the dealer. The interest rate that the dealer quotes you is usually higher than the interest rate that the lender quoted the dealer. This is because the dealer takes a cut for handling the financing. Because of the middle-man between you and the lender, you end up paying more than you should.

2. They’ll avoid telling you the bottom line. The dealer sees you as a blank check – the more money they can get from you, the higher their commission. They want to get the most money that they can from you, so they will be quoting you higher interest rates than what the lender offered and trying to sell you on different packages that you don’t need. Instead of telling you how much the car costs, they will ask you “how much would you like to pay a month?” This leads to consumers leaving the dealership with longer terms and a higher price tag than they anticipated.

3. “No credit, no problem.” Dealerships that offer in-house financing with slogans like “no credit, no problem” are something to be extremely wary of. At these dealerships, you are paying directly to the dealer, and your interest rate will be astronomically high. Some of these dealers will even install a device in your car that helps them repossess or disable your car if you miss a payment.


Financing through a credit union:

1. You can get pre-approved for an auto loan. When you come to a credit union for pre-approval, you will be given a quote or a conditional commitment letter that lays out the terms of the loan that you want to take out. You then take this to the dealer and finance the car of your choice with this pre-approved loan. By doing this, you bypass all of the negotiation and you know what your interest and term is before you pick out your car. You are protected from the “how much would you like to pay a month” tactic because you already know the answer.

2. You will receive lower interest rates. Because there is no middleman between you and your lender, your interest rates will be a lot lower when you finance with your credit union. You have a longer-standing relationship with your credit union than with an auto dealership, and your loan officer will work hard to make sure that you get the best loan for your financial situation.

3. You will receive free educational resources. When you take out an auto loan with your credit union, you will be able to take advantage of the resources that the credit union has to offer. Financial counseling and online resources will be open to you because the credit union is dedicated to your success.


The key takeaway here is that you should always do your research before financing a vehicle. It is easy to get swept up in the pushy tactics of car salespeople, but it may not be the best option for you. Before walking into the dealership, you should check out their website and see if you can find any information on who their lenders are and how they typically finance their cars to buyers. You should also check out your credit union’s website to see what they offer (we have all of the information about our auto loans right on our website). Studying your options can save you a lot of time, money, and headaches in your future. An informed consumer is a protected consumer.

Rachel Morris