Are Auto Loans Through a Car Dealer a Good Idea in 2025?

Are Auto Loans Through a Car Dealer a Good Idea?

The average cost to own a vehicle these days - including monthly payments, gas, insurance and maintenance - is over $10,000.

It is a hefty amount to put out each year, considering a vehicle is one of the worst investments a person can make. Unlike other investments, such as real estate, vehicles depreciate in value every year. From the minute you drive off the dealer's lot, you're vehicle already has lost about 10 percent of its value.

Knowing the facts and figures about owning a vehicle doesn't stop people from having them. With public transportation in some areas lacking, vehicles are required to get around.

For most people in the market for a new or used vehicle, securing a loan to help finance the purchase price is necessary. While most auto dealers offer on-site financing as part of the convenience of doing business with them, it may not always be the best idea to opt for this kind of financing, as it usually is the most expensive option.

Auto dealers account for the source of nearly 80 percent of all new vehicle financing. But while auto dealers have a variety of financial institutions available with which to broker you the "best" deal, they also tend to add on hidden fees to earn a little extra money on the side for offering that convenience. Car dealers, by law, are permitted to tack on as much as 3 percent in fees to any loan it helps to secure for its clients. Many vehicle buyers are unaware this occurs, and assume the rate they are getting is based solely on what the financial institution offered the auto dealer.

Car dealers also are not subject to the same rules and regulations as other financial institutions when it comes to lending practices. In 2010, Pres. Barack Obama signed into law new legislation designed to protect consumers seeking loans from financial institutions. The law is intended to protect the consumer from unethical lending practices. However, it does not extend to car dealerships. Auto dealers also are exempt from other important consumer protection laws such as the Truth in Lending Act.

The Better Business Bureau reports that car dealerships are the most-reported industry for complaints it receives from consumers.

So are auto loans through a car dealer a good idea? The answer is a resounding no.

The best way to finance a vehicle is by securing a loan before you ever set foot on a dealer's lot. One of the best places to start is with online auto loan companies. They usually have access to many bank car loan rates and can automatically compare these and deliver you the rock-bottom best auto loan deal. If you are a longtime member in good standing with your local financial institution, you may also visit them to see what kind of interest rate and maximum amount you are qualified to borrow.

Financing outside of the dealership will not only land you a better deal in the long run, but it also will help you to determine whether you can afford the monthly payments in your budget before you even step foot on a car lot.