Bank vs. Dealer Financing
The bottom line is that car dealers have access to lower rate financing than most banks offer, but they do mark-up their interest rates and there's a difference between a car dealership's "buy" interest rate and "sell" interest rate. Learn more on how financing at the dealership works in the article Tips for Purchasing a Car: What the Dealer Won't Tell You.
Banks that specialize in auto loans offer special rates to dealers as a way to buy car loans in bulk, so ask at the dealership if the are connected to any banks or credit unions that offer lower rates. The dealers can and do mark up the wholesale interest rates to generate additional dealership profit. The dealer bank rates are usually low enough that the dealer financing department can match any local bank rate and still make a profit on the loan. Credit union members, however, often have access to lower interest rate offers.
Dealers also have access to financing programs provided by the new car manufacturers. Promotional rates to help sell cars will be very low when compared to bank auto rates; ask if there are promotional rates offered by the manufacturer because most dealer finance departments won't tell you upfront. Auto manufacturer loans often have a choice between a low, promotional rate or cash rebates; however, if you choose a bank over the dealer, you can still receive the cash rebate or use it as cash down because the rebate (when used as cash down) goes to the dealership, not the bank.
An on-the-ball dealer finance officer can help a buyer select the best option between financing options and using rebates, but do price shop before you take the dealership's offer--there may be a better one out there.
Car buyers with credit problems will often only find car financing approval through a dealership. Just as dealerships have access to better rates for car buyers with good credit, they have access to lenders who make car loans to buyers with bad credit and credit problems. A bank will not give a car loan approval to a bad credit applicant.
Wherever possible, if you do have bad or poor credit, you should avoid "Buy Here, Pay Here" car lots or in-house dealer financing because you'll most likely be paying an approximate 20 percent or higher interest rate.