If you are buying a car and want to borrow the money to pay for it, you have the options of (1) going directly to your bank or credit union and getting preapproved for a loan in a certain amount and with a certain interest rate, or (2) going to the car dealership and inquiring about dealer-arranged financing. One difference in these options is that with dealer-arranged financing the dealer may negotiate a higher interest rate with you than the bank offers, and take the additional money you pay in interest as compensation for the dealership. But if you are purchasing a new car, the car dealer may offer you lower interest rates than your bank or credit union.
In Texas, when financing a car purchase, you have two primary options: obtaining a loan from a bank or credit union, or opting for dealer-arranged financing. If you choose to get preapproved for a loan from a bank or credit union, you'll know the loan amount and interest rate in advance. This can provide leverage when negotiating the price of the car and can help you budget accordingly. On the other hand, dealer-arranged financing might offer convenience, as dealerships often have relationships with multiple lenders and can facilitate the financing process. However, the dealership may negotiate a higher interest rate than what the bank offers and keep the difference as compensation. This is known as a 'dealer markup.' While this might result in a higher overall cost, dealerships sometimes offer promotional financing deals, especially for new cars, which can have lower interest rates than those offered by banks or credit unions. It's important to compare the total costs and terms of any financing offer and consider negotiating the terms of dealer-arranged financing just as you would the price of the vehicle.
