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Last updated: December 14, 2023

Dealer vs Bank Financing Calculator

Decide whether to finance with a low interest rate from the dealership or take a cash rebate and finance with a lender.

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This calculator will help you determine whether to choose a cash rebate or a 0 percent financing offer from a dealership. Enter the sales price of the vehicle (minus trade-in and down payment), the dealership’s rebate offer, bank or credit union’s interest rate, and loan term in years.

Low Interest Rate vs. Rebate

Dealerships often give customers the choice between special low interest rates—sometimes as low as 0 percent — and a cash rebate. The best option depends on a number of factors, like your credit score, monthly income, and financial goals.

Pros and Cons of Low Interest Rates

Pros:

  • Cost savings over time: A low interest rate means you’ll pay less in total interest over the life of the auto loan, which can save you money in the long run.

  • Lower monthly payment: Depending on your loan term, a low interest rate often translates into lower payments than a rebate with higher interest.

  • Quicker repayment: Because more of your payment goes toward the principal of the loan rather than interest, you can often pay back low-interest loans more quickly — especially if you accelerate your car payments.

Cons:

  • Limited selection: Dealerships typically offer special low interest rates — especially 0 percent — on select new vehicles, so it’s possible your vehicle of choice isn’t eligible. Additionally, financing a new car at a low interest rate will usually cost more in the long run than financing a used car at a higher interest rate.

  • Contingent on excellent credit: To qualify for the lowest interest rates, you need an excellent credit score — typically at least 780, which is higher than the average American score.1

Pros and Cons of Rebates

Pros:

  • Financing flexibility: Choosing the cash rebate gives you the flexibility of financing with another lender that better suits your preferences. You might even find a loan with a competitive interest rate similar to the dealer’s offer.

  • Upfront savings: You can put a cash rebate toward your down payment, which will reduce the amount you have to borrow (especially if you can apply the rebate before taxes).

  • More accessible: Rebates don’t have the same stringent credit requirements as low interest rates.

RELATED:

Check out our roundup of the best auto loans based on interest rate, loan terms, refinancing options, and more.

Cons:

  • Limited selection: Like low interest rates, rebates are often available only on certain new vehicles, so make sure the vehicle you want is eligible. Additionally, because new cars are so expensive, you may save in the long run by financing a used car without the rebate or special low-interest-rate offer.

  • Higher monthly payments: If you take the rebate and get a loan with a higher interest rate, you may end up with higher monthly payments (especially if your down payment was minimal).

How to Decide Between a Low Interest Rate and a Rebate

  1. Determine the rebate amount, and find out whether you qualify for 0 percent or low-interest financing given your credit score and financial health.
  2. Explore your other financing options — we recommend shopping around with three to five lenders — and compare their interest rates and loan terms with the dealer’s offer.
  3. For each scenario, calculate your monthly auto loan payments and how much you will pay in total interest over the loan’s lifetime. Don’t forget to factor the rebate into your down payment.
  4. Weigh the options against your budget, vehicle preferences, and financial goals. In general, we recommend minimizing the amount of total interest you pay and paying the vehicle off as quickly as you can without squeezing your budget too tightly.

FYI:

If you put down less than 20 percent or finance for 60 months or longer, you risk owing more on your vehicle than it’s worth (also known as being upside-down on the loan) due to depreciation. In this scenario, it may be worth purchasing gap insurance. Certain insurers — such as State Farm and USAA — also offer auto loans and may include gap insurance if you finance and insure the vehicle with them. In general, buying gap insurance from the dealer is the most expensive option.

Dealership vs. Bank Financing

With dealer financing, you get an auto loan directly from the car dealership, often on-site. Bank financing involves applying for a loan from a separate financial institution, like a bank or credit union.

Pros and Cons of Dealership Financing

Pros:

  • Convenience: Dealerships approve you for financing on-site, streamlining the car-buying process.

  • Special promotions: You may qualify for special interest rates — sometimes as low as 0 percent APR.

  • Opportunity to negotiate: If you opt for dealer financing, the dealership may be more willing to negotiate on the price of the vehicle.

Cons:

  • Potentially higher interest rates: If you don’t take advantage of a special offer, dealer interest rates tend to be higher than bank or credit union rates. Dealers tend to mark up their interest rates in order to make a profit.

  • Disadvantageous loan terms: Be wary of dealers pushing long loan terms, which keep your monthly payment low but ultimately cost you thousands more in interest. Additionally, dealer financing may come with pressure to purchase products that you don’t need or could find cheaper elsewhere, like extended warranties or gap insurance.

Pros and Cons of Bank Financing

Pros:

  • Potentially lower interest rates: Banks and credit unions tend to have lower interest rates for auto loans than dealerships, especially if you have good credit. And unlike the dealer, good interest rates usually aren’t limited to specific vehicles.

  • Compare options: When you shop around with different lenders, you have the chance to compare multiple options and find the most competitive offer.

  • Flexible terms: Banks and credit unions typically have a wider range of financing options than dealerships, allowing you to choose terms that suit your financial goals.

TIP:

Generally, you don’t need to have an account with a financial institution in order to qualify for an auto loan from it.

Cons:

  • Less convenient: To finance with an outside lender, you’ll need to fill out a separate application for each lender and wait several days or more for it to be processed. In some cases, you need to visit a branch to apply.

  • Stricter criteria: Banks tend to have stricter credit requirements than dealerships, making it difficult to get a loan with bad credit.

How to Decide Between Dealership and Bank Financing

  1. Determine your budget and the price of a vehicle you can afford comfortably.
  2. Get interest rate quotes from the dealership and other lenders, such as your bank, credit union, or even an online lender.
  3. Compare terms and conditions other than interest, like loan duration, fees, and prepayment penalties (which could affect your ability to refinance the loan).
  4. Before going to the dealership, get preapproval from a lender. That way, you have a clear budget and you won’t be forced to take the dealer’s financing.
  5. Evaluate the total cost of financing, including total interest, fees, and required add-ons from the dealership, and determine the best option for your budget and personal preferences.

Bottom Line

Financing a car through a bank is often better than a dealership because you essentially cut out the middleman, which can lead to lower interest rates. You can then apply the cash rebate to the down payment or pocket the money. However, in some cases, financing through the dealer may be advantageous, especially if you can get a 0 percent APR and have a down payment already saved. And, if you definitely plan to finance with the dealer, taking the low interest rate is usually your best bet in the long run.

Regardless of what you decide, it’s a good idea to check interest rates with another lender and walk into the dealership preapproved for an auto loan. That way, you’re not stuck with the dealer’s terms. Additionally, if the dealership finance office knows you have another loan lined up, it may offer you a better deal. If the loans are similar enough, some people may find the convenience of dealership financing is worth paying a little more in interest.

Buying a car is a major purchase. If something about the process makes you uneasy, it’s best to trust your intuition and look for a better deal. The right car is the one that safely gets you where you need to go, without breaking the bank.

Citations

  1. What Is the Average Credit Score in the U.S.? Experian. (2023, Feb 24).
    https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/