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Buying A Car: What's the Word On Dealer Financing?

"I’m getting ready to buy a new (to me) car. I’ve saved up some money for a down payment, I know how much car I can afford, and I have a pretty good idea of what car I want. I feel like I’m ready to head to the dealership. My question - How do I know where to get my car loan? A friend told me getting a loan from a dealer really hurts your credit score. Is this true?"// Dear New Wheels, Great job on the research portion of this process. Walking into the dealership knowing what you're looking for will help ensure you don’t take on too much car or too much payment. Now, to your question about financing. Your friend is only partially correct regarding dealer financing.You see, when you allow a dealership to shop for financing on your behalf, they’ll apply for a loan through multiple lenders. Each of these applications (called inquiries) will show up on your credit report but they won’t all impact your score. To allow borrowers to shop for competitive rates, the credit bureaus don’t allow each inquiry to negatively impact your score. Though not all credit scoring models treat these inquiries the same way, as long as all inquiries are run within a two week period they will only impact your score once. That said, just because going to the dealership won’t harm your score more than using a different lender doesn’t mean this is the best route.

There are advantages to securing financing before entering the dealership:

  • It can save you time. 
  • Have you been to a car dealership lately? Purchasing a car is a whole day affair. If you can secure financing ahead of time this will eliminate one stop at the dealership. 
  • The dealership won’t know how much you can afford
  • There is likely a significant difference between what a lender will allow you to borrow and what I would suggest you borrow. Keeping this number to yourself will help ensure you stick to your budget. 
  • Convenience 
  • With interest rates as competitive as they are it’s unlikely there will be a significant difference in the rates you’re offered across different lenders. If you can secure financing with a bank or credit union you already have a relationship, that means just one less company to make a payment to. 

There are advantages and disadvantages to securing your financing through the dealership. If you can stick to your budget under pressure and you want to ensure the lowest rate, go ahead and let the dealership help with financing. If you’d rather keep your accounts with a bank or credit union you use and they have a competitive rate - that’s ok too.