By Anthony Santiago - Editor-in-Chief

May 9, 2023

Dealer Financing vs. Third-Party Financing - What You Need to Know

If you are like me and every other buyer, you need to know how much you pay for your vehicle and where you get the money. 

The truth is that buying a new vehicle is an exciting time, but having the WRONG approach to your Financing can quickly deflate your goal to get behind new wheels. This is also true if you plan to buy a vehicle after the lease.

Before we get ahead of ourselves, I'm happy you clicked on this article to help set the record straight on the differences in your financing options. Every dollar counts, and your money mindset is important. 

Here's an interesting fact, CNBC reports that a car purchase is the second biggest expenditure after housing. 

Dealer Financing and Third-Party Financing are two distinct financing options. Dealer financing is obtained directly from a car dealership, whereas Third-Party Financing is when you get a loan from an outside lender.

Here's how they compare:

   Dealer Financing

   Third-Party Financing

   May have higher interest rates

   Can offer lower interest rates

   Limited comparison options

   More options available

   Credit score restrictions may apply

   More flexible credit requirements

   Convenient option at the dealership

   Application process can be completed online

Financing a car can be stressful, but understanding your options is the key to making good choices. 

Dealer Financing and Third Party Financing are the two main options available. The first is borrowing directly from the dealership, while the latter involves getting a loan from an outside lender. Typically, third-party(external) lending can get you better rates. But if you need better credit, dealership financing might be an easier option.

So it's important to consider all the factors before deciding if you will go with Dealer Financing. 

So what exactly is Dealer Financing?

This type of loan is offered by dealerships at purchase time as a convenient way for buyers to finance their vehicles. I have personally used Dealer Financing when purchasing my BMW and found that the rates were very competitive. 

In fact, 70% of all the Financing we have gotten was from dealerships. It is much easier and more convenient since the dealership's finance team will shop around for loans you qualify for. 

As mentioned earlier, my family has used dealer financing from Honda, Acura, Nissan, BMW, and Mercedes Benz Financial. 

While it does offer advantages, there are some potential drawbacks too. 

One advantage of Dealer Financing is that it streamlines everything by having one entity act as both seller and lender. This is probably the #1 reason most buyers go this route. 

This can simplify things and save you time compared to finding lenders elsewhere. 

However, for best results, research and compare rates from various lenders before committing yourself financially. 

Do you prefer an easy, peasy, 1-2-3 buying process? The dealer financing may be the ticket for you!

By opting for this route, not only can you simplify your car buying journey by securing everything in one place - vehicle AND financial arrangements - but you MIGHT be missing out on opportunities for lower interest rates at a credit union, for example. 

Set Interest Rates

However, keep in mind that certain limitations may apply to dealer financing as opposed to exploring other loan options elsewhere. Dealer-financed loans may have High-Interest Rates, which could result in inflated costs to the bottom line total out-of-pocket costs. 

Predatory Lending Practice of Extra Fees

Unfortunately, some dealers may take advantage of customers by charging extra fees or increasing rates within loan contracts - a Predatory Lending Practice. Most manufacturer dealerships are not able to do so, but just be aware of what is on the contract. 

Less Negotiation Power

However, buyers can still wield the power of negotiation by obtaining Financing before visiting dealerships. 

This way, you can avoid accepting dealer-supplied Financing and take advantage of better negotiating opportunities. Adding to expenses are dealership companies' costly Add on Services which should be known before heading in for your next vehicle purchase.

Instead, consider Third Party Financing, which could offer more favorable terms and conditions. 

Let's discuss why you might consider Third-Party Financing.

What is Third-Party Financing?

If you are having trouble securing Financing through dealerships, there are other options worth considering, like Third-Party Financing, where an outside financial entity offers funding instead. 

This is typically a local credit union. But does this method offer more benefits than drawbacks? 

NOTE: I have personally used a credit union as well. The process was pretty simple and was over the phone. The rates were comparable, and I was able to use the auto loan for a private party sale.

Key Benefits of Third-Party Financing

Third-Party Financing offers lots of advantages, namely lower rates typically. Since these are smaller financial institutions, there is a personal touch for members and lenders. Here are a few advantages of using third-party Financing. 

  • You have more options and access to money to use for any brand or dealership. Dealerships typically have a set number of institutions to work with.  
  • Third-party financing options are often more flexible than traditional banks and lender agreements.

Drawbacks of Third-Party Financing

Although credit unions are known for providing lower interest rates when compared to traditional banks, keep in mind that their loan approval process can be more challenging. Some have reported that borrowers might need an elevated credit score or additional documentation before being eligible for a loan.

What's more, some Credit Unions have limited lending options based on membership requirements that might limit your options in terms of financing opportunities. 

Comparison between Dealer Financing and Third-Party Financing

To understand the differences between dealer financing and third-party financing when buying a car, you need to compare their interest rates and fees, approval process, flexibility and options, and customer service. Each subsection plays a key role in determining which financing option is best for you, so read on to learn more about these distinctions.

Interest Rates and Fees (March 2023)


Credit Union


Used car loan, 48 months

5.43 %

6.37 %

Used car loan, 36 months

5.30 %

6.32 %

New car loan, 60 months

5.38 %

6.06 %

New car loan, 48 months

5.25 %

5.98 %

When determining what kind of financial arrangement works best? Consider this:

Dealership financing tends to come with higher interest rates, although there may be some promotional rate offerings to be found among individual dealerships, which have been lower than some Credit Unions. 

Meanwhile, the best rule of thumb is if you want lower interest rates overall, then Third party lenders are likely your best bet.

But it would help if you kept in mind that some lenders might have prepayment penalties. 

For example, Dealer financing includes extra fees, like origination and document fees. Third-party lenders usually don't charge additional expenses.

If you're looking at a long-term agreement for car ownership, then dealer financing is worth considering - but if you want a less complicated arrangement without additional charges involved? Third-party lending remains the way to go.

Approval Process

When it comes to vehicle financing, the approval process differs between the dealer and third-party Financing. 

Dealer financing often requires a quick application and is based on credit score, income, and debt-to-income ratio. This is easier since the dealership has all the details on the vehicle being financed. 

Third-party Financing involves applying directly to a lender, such as a bank or credit union; this process takes more time because you will have to submit the year, make, and model of the vehicle. The lending institution will have to determine the market value in order to determine if the loan amount is applicable. 

However, because you are shopping around for the best rates, it allows for more negotiation power in terms of interest rates and loan terms.

It's crucial to remember that the approval process will depend on individual factors. A friend was refused dealer financing due to student loan debt but, with some negotiation, managed to get favorable loan terms with third-party Financing. So, don't limit yourself - explore the possibilities that come with third-party Financing!

Flexibility and Options

Flexibility and Options differ between Dealer Financing and Third-Party Financing. 

With Dealer Financing, customers will find the process simpler. The finance office will present interest rates and work on securing the loans on your behalf. Customers can typically enjoy longer loan terms and avail discounts on interest rates. 

Third-Party Financing can include additional documentation on the vehicle along with shorter repayment periods.

As mentioned already, dealerships can offer special incentives in case of vehicle trade-ins or play with the numbers to align with the customer's financial goals.

In fact, some dealerships can also extend credit for accessories, loyalty discounts, and free maintenance packages to enhance the buying experience.

Customer Service

Customer service is another important consideration when securing an auto loan.

Dealer financing focuses on building and maintaining strong relationships with the brand for customers, but third-party Financing emphasizes financial assistance to the borrower.

Just like a bank, third-party lenders have customer service centers where buyers can get answers to their financial questions. This makes the customer experience simpler and more focused on financial help. 

Furthermore, data shows that third-party lenders offer online support. Buyers can manage their accounts, make payments and look after their loans from home. This saves time and keeps customers up-to-date with their loan status.

Here is an interesting fact about borrowers. Research shows that third-party financed cars suffer fewer delinquencies than those bought through dealerships. A Lending Tree study found that auto loans obtained from dealerships were three times more likely to be late than those from banks or other external financial institutions.

Choosing the Right Financing Option for You

As I mentioned at the beginning of the article, buying a car can be exciting, but when the rubber meets the road with Financing, you need to be sure you understand all of your options. 

Choosing between third-party or dealer Financing can be daunting, so it's vital to fully explore both options before making any decisions. Third-party Financing involves securing a loan from an independent finance company which affords greater flexibility by allowing comparisons of rates from multiple lenders resulting in better opportunities for negotiating terms and interest rates versus in-house options, keep in mind that this will require good credit scores along with the possibility of down payments requested. 

Bad credit scores will typically disqualify you from Credit Unions. If you have a bad credit score, then explore dealer financing. It is usually easier since loans have higher interest rates and vehicle values are known.

Dealer financing (in-house) means borrowing directly from the dealership where you're buying your vehicle. This provides simplicity in financial arrangements since there's just one party involved. 

Regardless of which option you select, it's crucial to assess factors like interest rates and fees.

Taking the time to carefully consider each choice before committing is essential to avoiding future regrets when monthly payments come due. 

It may be helpful to research customer reviews of lending sources online or negotiate with dealerships or financiers for better terms. 

It's also important to have a clear understanding of any conditions attached based on your credit rating. Keeping a long-term perspective and thinking beyond just upfront or instant gratification will help ensure that you make smart decisions throughout the entire ownership process. 

With these steps in mind, you can navigate financing options confidently and enjoy your new car with peace of mind and ease.

Frequently Asked Questions

1. What is dealer financing?

Dealer financing is when you obtain a loan directly from the car dealer or the dealership. The dealer acts as the lender and provides the Financing for the vehicle you purchase.

2. What is third-party Financing?

Third-party Financing involves obtaining a loan from a bank, credit union, or other financial institution that is not affiliated with the car dealership. In this case, the dealer is not involved in providing Financing.

3. What are the advantages of dealer financing?

Dealer financing may offer certain advantages such as convenience, ease of approval, and the ability to negotiate better terms. Additionally, the dealer may offer special promotions or incentives to encourage you to finance through them.

4. What are the advantages of third-party Financing?

Third-party Financing may offer lower interest rates, more flexible repayment terms, and a wider range of options. 

5. Which option is better, dealer financing or third-party Financing?

There is no one-size-fits-all answer to this question. The best option depends on your unique financial situation, credit history, and personal preferences. It's important to compare and contrast the terms and benefits of both options and choose the option that best fits your needs.

6. Can I use both types of Financing simultaneously?

NO, you cannot use both dealer financing and third-party Financing simultaneously. You must choose one option or the other to finance your vehicle purchase.

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Anthony Santiago - Editor-in-Chief

About the author

I am a passionate car enthusiast who likes to help people save money and avoid headaches when it comes to cars. I believe that everyone can find the right car at the right price. I share my tips and experience so you can learn quickly and maximize your next SUV, truck or car purchase.

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