In-house financing is a type of loan provided by a business directly to a customer, allowing them to purchase goods and services offered by the business. This kind of financing eliminates the need to secure a loan through a financial institution

With in-house vehicle financing, you’re getting a car and a loan all in the same place. Going straight to the source can mean more flexibility than applying for a loan through a bank — especially if you have less-than-perfect credit.  

There are some important differences between in-house and bank financing, not to mention pros and cons, so let’s get into it.

How does in-house financing at car dealerships work?

Dealerships that offer in-house financing either work with a private lender to get a loan on your behalf or they provide the financing directly to the customer. You borrow the money needed to purchase a vehicle directly from the dealership and make monthly loan payments to said dealership. In-house financing dealerships usually don’t need more than proof-of-income to approve you for a car loan.

In-house financing through car dealerships – pros and cons

Pros:

• It’s flexible. Dealerships with in-house financing have less requirements and regulations than banks, so customers with bad credit or no credit history have a better chance of getting approved for a car loan.

• It’s convenient. Getting a loan at the same place you’re shopping for a car will save you from having to go back and forth between your bank and dealership to finalize the purchase.

• It helps build credit. A car loan is a form of installment credit, which means you can’t borrow more than you’re approved for and you have a set amount of time to pay it back. In-house financing allows customers with bad credit to rebuild their credit standing over time.  

Cons:

• Your interest rates could be higher. Getting in-house financing through a dealership usually means paying more in interest over the length of your loan. However, dealerships might be more likely to offer you a lower interest rate if it means closing the deal.

• There are limited contract options. Many dealerships offer closed financing, which means you won’t be able to pay off your loan ahead of time or will have to pay a penalty if you want to end your contract early.

• Some dealerships don’t report your payments. To benefit from the credit-building qualities of a car loan your payments need to be reported to each of the national credit bureaus, TransUnion Canada and Equifax Canada. Ask the dealership if they report to the credit unions before you sign a contract.

How does financing a car through a bank work?

Most major financial institutions offer car loans. When you buy a vehicle with bank financing the money for the purchase comes from your bank or credit union.

You then repay what you owe on the car to the bank each month. This is traditionally the way most car shoppers get financing because it’s easy to work with an institution you already have accounts with. Unfortunately, bank financing can be difficult to secure for folks with bad credit.

Financing a car through a bank – pros and cons

Pros:

• It’s comfortable. Most people already have an established relationship with a bank or credit union, which can make applying for a car loan less intimidating because you’ll probably end up negotiating with an employee you already know. Also, if you fall behind on payments your bank could be more lenient than a dealership.

• You’ll have access to lower interest rates. Banks have larger financial margins than dealerships so they can afford to offer lower interest rates to customers.

• You can consolidate your debts. If you already have a loan through your bank, like a line of credit or a mortgage, it can be easy to lump a car loan in with what you already owe. This way you’ll be able to pay off everything in the same spot.

Cons:

• It’s harder to get approved if you have bad credit. Banks have much tougher requirements for approval and most require high credit scores. This is because they want to make sure they’ll be repaid for every dollar they lend out.

• You’ll have to wait longer. Large financial institutions can be slow to process car loan applications and you could end up waiting a long time to find out if you’ve been approved. This could mean losing out on a car you love because your financing didn’t fall into place in time.

• There’s more paperwork required. In addition to proving how much money you make, a bank may also ask you to provide proof of residence, vehicle information, proof of insurance and employer information before they look at your application.

What is the main difference between bank financing and dealership in-house financing?

The main difference between bank financing and in-house financing is that bank loans have longer payment terms. You can choose to pay out the loan amount in as short as five years, or as long as 20 years. Dealership in-house financing involves a shorter period to settle balance, usually up to five years.