How to Finance a Car Through a Bank

If you’re considering buying a new car, there are lots of options available to you, including when it comes to financing a car. You can get an auto loan through a bank or a car dealership, and the process for both can vary. Be sure to look at your options and see what would work best for you.

In this article, we’ll discuss how to finance a car through a bank, including the pros and cons and how the process works.

What does it mean to finance a car through a bank?

When you finance a car with a bank, you apply for the auto loan directly from the bank instead of financing through the car dealership. This gives you the option to compare deals from different banks (as well as credit unions and online lenders) to find a loan that is suitable for you. ^[1]

Steps to finance a car through a bank

Getting a car and financing it through a bank requires a few steps, take a look at the key steps in detail below.

1. Check your credit score

Before you start looking at cars and financing options, check your credit score to give you an idea of your eligibility for certain loans and interest rates. Your credit score indicates your level of risk to a lender, with a higher credit score typically being low risk, and a lower credit score generally making you a higher risk.^[2]

Typically, someone with a lower credit score will pay more in interest for an auto loan. Data from Experian as of Q3 2024 shows that the average interest rate for a new car ranges from 5.08% for someone with an excellent credit score to 15.43% for someone with a poor credit score.^[3]

Source ^[3]

2. Get preapproved

Preapproval for an auto loan can help you learn how much money you can borrow, and at what interest rate, when you are ready to buy a vehicle. Sometimes banks will give preapproved loans if you qualify for certain loan terms. Preapprovals are typically more in-depth than prequalifications, and you might have to submit documents that prove your income and agree to a credit check that results in a hard inquiry. The information you submit for a preapproval could give you a more accurate estimate of the loan offers you could receive. However, you’ll still need to apply for the loan formally when you’re ready to buy a car.

Auto loan pre-approval can come with some requirements, such as a certain level of gross income for specific loan amounts, so that you meet the required debt-to-income ratio. This can help lenders understand how likely you will be to pay back your loan. Seeking pre-approval for an auto loan can also result in a hard inquiry which can impact your credit score.^[4]

Different lenders will offer a variety of loan terms, so you might want to shop around for loans from different banks to ensure you’re getting a deal that works best for you. Bear in mind that a pre-approved auto loan is usually valid for one or two months before it expires, so use this time to find a loan and car that suits you.^[5]

3. Shop for your car

Now that you have an idea of the auto loan you could be approved for, you can start looking for a vehicle with a budget in mind. Once you’ve decided on the make and model of the car you want, consider whether you want a brand new one or if an older model would be better suited to you. You could choose the model from the most recent year, or a model from a prior year, which will typically be cheaper.^[4]

As well as looking at different vehicle models, shop around with different dealerships as well to see which one offers the best price, any incentives they might have available, and whether they are well-reviewed by other customers.^[4]

4. Get your documents together

Once you’ve chosen your car and you’re ready to apply for an auto loan with a bank, there are some documents you’ll need to gather.

• Proof of identity - This could include your driver’s license, passport, U.S. visa, or any other government-issued photo I.D.
• Proof of income - Some lenders will ask for copies of your pay stubs or alternative methods to prove your income like a W-2 form or a bank statement.
• Social Security Number - Lenders will ask for your Social Security number alongside your name, address, and date of birth so they can run a credit check.
• Proof of address - This could include your driver’s license or the address on your credit report or, if you have moved recently, a utility bill, mortgage statement, bank statement, or similar document.
• Vehicle details - When financing through a bank, you’ll need to provide the vehicle purchase price, vehicle identification number (VIN), and the year, make, and model of the car. These can usually be obtained through a bill of sale, purchase agreement, or buyer’s order.
• Current vehicle details - If you’re trading in your old car, you may need to provide the title and registration which provides you are the owner and includes details of any lien holders.
• Proof of insurance - Usually this will be included in a declarations page. Some lenders might require you to have certain coverage or deductibles in your insurance plan, so it’s best to check this before arranging your insurance.^[6]

5. Confirm the loan details

When you have chosen your new vehicle and sent all of the required information to your lender, they will disburse the funds to the car dealership (or the seller if you’re buying privately).
Before you sign the loan agreement, make sure you read the terms and conditions in full and make sure you understand the monthly payments, interest rate, and any other associated fees. Once you’re happy with everything, sign the agreement and take ownership of your new car.^[2]

The differences between bank financing and dealership financing

Bank financing

• You apply for the loan directly with a bank, credit union, or online lender.
• Can speed up the sales process if your loan amount is already set when you begin car shopping.
• Might help you get the best loan terms as dealers typically work with limited lenders and could mark up the annual percentage rate (APR) as compensation for organizing the loan.
• The loan process might take longer as some lenders won’t offer preapproval without knowing which car you are buying.
• Shopping around for different loans can take time, and if you’re buying a used car you’ll need to research vehicle and eligibility requirements yourself.^[1]

Dealership financing

Dealerships often have different types of financing available:

• Dealer-arranged financing - This involves the dealer acting as a middleman between you and the lender. You’ll choose your car and fill out a financing application which the dealer will submit to different lenders for you.
• Captive financing - Some dealers offer auto loans from the car manufacturer’s own finance company if you buy a new or certified second-hand car. These financing companies might offer certain deals, but your choices could be limited. Some captive finance companies might offer lower interest rates or 0% APR loans as incentives from the manufacturer.
• Buy here, pay here (BHPH) financing - This is an in-house financing option whereby dealers offer auto loans themselves. These are often targeted towards buyers with poor credit or no credit history and usually have higher costs and require a larger down payment; they can also come with a greater risk of repossession.

Other factors to consider when financing through a dealership are:

• It can be more convenient if you would prefer not to research auto loans yourself, and you might get more options if you have bad credit.
• Some dealers offer finance deals for qualified borrowers, so if you have an excellent credit score, you might get a lower interest rate from a dealer compared to a bank.
• You can’t choose which lenders the dealer sends your application to, so you have less choice over the loans available to you.^[1]

Is it better to finance a car through a bank or dealership?

Neither a bank nor a dealership is specifically better when it comes to financing a car, but certain options may be more suited to you and your circumstances than others.

Source ^[1]

How long will a bank finance a used car?

The length of a bank auto loan can vary, but the typical repayment term for a car loan is 72 months. Bear in mind that repayment terms can vary from 12 months to 96 months, though different auto lenders will have their own limits when it comes to minimum and maximum loan terms.

Generally, the shorter the loan term, the more you’ll pay each month, and the lower the interest rate and total interest you’ll pay over the loan term. If you choose a loan with a longer repayment term, your monthly payments will typically be lower, but your interest rate could be higher, costing more in interest over the life of the loan.^[7]

Bottom line

If you’re in the market for a new car, financing through a bank could be a good option to consider if you want to shop around for different loans and get the best deal. Checking your credit score and getting pre-approved beforehand can help you understand all of your options before you head to the dealership to pick out a new car.^[1]

Sources

1. Experian, “Best Ways to Finance a Car” https://www.experian.com/blogs/ask-experian/is-it-better-to-finance-a-car-through-a-bank-or-dealership/
2. PNC, “How to Finance a Car: A Guide to the Auto Loan Process” https://www.pnc.com/insights/personal-finance/borrow/how-to-finance-a-car.html
3. Experian, “Average Car Loan Interest Rates by Credit Score” https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/
4. Experian, “How to Get a Car Loan” https://www.experian.com/blogs/ask-experian/how-to-get-a-car-loan/
5. Car and Driver, “What is a Preapproved Car Loan?” https://www.caranddriver.com/auto-loans/a31478323/pre-approved-car-loan/
6. Lending Tree, “Car Loan Document Checklist” https://www.lendingtree.com/auto/car-loan-documentation-checklist/
7. Chase, “How Long Can You Finance a Car?” https://www.chase.com/personal/auto/education/financing/how-long-can-you-finance-a-car

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.

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