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I'm an absolute beginner to car loans, and I was wondering what's going on between the financing agencies and the dealers when I finance my car loan. (My questions are about car financing in the US.)

Having done a little bit of research on how the car financing works, I learned the following points about financing my car with the dealer (please correct me if any of them is wrong):

  1. The dealer takes my information, runs my credit, tries to find a loan from a financing agency (bank, credit union, etc.), and then gives me the deal they get with a little extra interest that they take for themselves.
  2. I pay the installments directly to the dealer.
  3. I won't become the owner of the car until I pay all the installments in full.

What's different about each of the 3 points above, when I finance the car loan through my bank? I'm specifically interested to know the answer to the questions below:

  1. Does the bank pay the full price to the dealer right at the beginning and all the installments payments are just between me and the bank without the dealer being involved?
  2. Will I be the official owner of the car from the beginning? If not, who will be the owner when the payments start until I fully pay all of the installments? The bank or the dealer?

Please correct me if there's anything wrong or inaccurate in my knowledge about the process, I have absolutely no background in this type of stuff.

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    Your best bet is to remain a beginner: Don't get one. Car loans are a terrible hindrance to wealth building. Buy cars with cash that you saved. – Pete B. Sep 4 '18 at 11:06
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    @PeteB. I figured that's probably the wise choice for me, and I'm probably going to do that. – nra Sep 4 '18 at 14:31
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    your future self will thank you very much. Good work on considering this. – Pete B. Sep 4 '18 at 14:33
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    I disagree that car loans are a bad thing. Buying a new car is generally not the best financial move due to depreciation, true, but only buying a car that you can pay for NOW in cash is arguably far from the 'ideal' option. Two arguments: 1) The case where the buyer may not have much liquid cash on hand and thus the best car they can buy outright is quite well worn and will require frequent upkeep at cost. 2) Car loan rates are incredibly low (assuming in the US) and cash could likely earn more money from investment in stock rather than the asset of a (used) car. – Brian R Sep 4 '18 at 14:39
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    @PeteB. Ive previously managed to get a 2 year car loan for less than 2 year municipal bond rate at the time. In some cases it can be a positive for wealth building. (I did in fact take the loan and used the cash I would have used for investing. Car loans are a great way to get leverage as the rates are usually dramatically lower than personal loans.) – Vality Apr 22 at 18:24
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Actually, there's very little difference. Your description of the bank financing is more accurate.

  1. The lender (bank, credit union, etc) pays the full purchase price of the vehicle up front.
  2. You pay the lender.
  3. The title of the car is filled out with you as owner and the lender as lienholder.
  4. The lien prevents you from legally selling the vehicle without the lender's permission, until it is released.
  5. To also reduce the temptation to do an off-the-record sale, the lender also physically holds the title document.
  6. When you finish paying the loan, the lender sends you the title document and a letter verifying that the lien is satisfied.
  7. If you choose, you can send that letter to the state and get a clear title with no lien listed. That way you don't have to keep track of the release document and produce it when selling (but the state will charge a fee for updating the title).

When the seller arranges financing, three methods are possible:

  • The seller introduces you to the lender (bank, credit union, manufacturer-captive finance company, etc.), but everything proceeds exactly as above. The bank may give the seller a kickback as a reward for doing the introduction.
  • The seller may serve as a local point of contact for the loan, so you make out checks to the lender but send them to the seller.
  • The seller and lender can be the same (usually this "Buy Here Pay Here" is only done by used car lots catering to poor credit buyers at exorbitant rates). Stay away from dealers that do this; this is more acceptable between private parties (private party lending arrangements are subject to state usury laws and won't have such ridiculous interest rates).

But in all of these cases, the title is treated the same. You are the owner of record, and the lender holds a finance lien.

  • Would your third bullet opinion "stay away from dealers" where the seller and the lender are the same entity apply to manufacturer owned finance e.g. GMAC or Toyota Motor Acceptance Corporation? – user662852 Sep 4 '18 at 9:05
  • @user662852: In manufacturer-affiliated finance, the manufacturer is the lender and the seller is the dealer, so they are not the same. I'm saying to stay away from the case where the dealer is the lender. (If the manufacturer is the seller and the dealer doesn't own the vehicles, just sells them on contingency, that's a bad sign of a different sort) – Ben Voigt Sep 4 '18 at 13:10
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    I think this answer needs to clarify that manufacturer finance companies are separate banks under bullet 1 (and the typical example of the entity that will kickback to the dealer) as the phrasing was such it was not clear on my first read – user662852 Sep 4 '18 at 14:16
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I learned the following points about financing my car with the dealer ...

I pay the installments directly to the dealer.

This is usually not the case, AFAIK. (I've only ever used the finance company connected to the car manufacturer, so I've always had instructions to pay the lender before leaving the lot) After the dealer finds a lender, you will get instructions to send your payments to the lender.

I won't become the owner of the car until I pay all the installments in full.

This is not correct. You are the owner of the car as soon as you pay the dealer for it (using borrowed money).

The lender does have a lien on the vehicle, meaning they have a right to take it from you if you fail to make payments, and to receive payment from you before you sell it to anyone else.

But you have all the responsibilities of owning the vehicle, such as paying property taxes on it and maintaining it according to your state's laws.

What's different about each of the 3 points above, when I finance the car loan through my bank? ...

Does the bank pay the full price to the dealer right at the beginning and all the installments payments are just between me and the bank without the dealer being involved?

This is correct, but it's also the same when the dealer brokers the loan.

Will I be the official owner of the car from the beginning?

You will be the owner. Again, this is the same as when the dealer brokers the financing.

As with dealer brokered financing, the bank will hold a lien on the vehicle, be able to repossess it if you fail to make payments, and require to be payed before you can sell the vehicle.

  • Selling the loan is possible, but I think most of the time the dealer is not the lienholder for even an instant, the finance company is the original lender. – Ben Voigt Sep 4 '18 at 0:58
  • @BenVoigt, I think that's true for new car purchases. But we see a lot of questions where the buyer drives away with the car and then the dealer calls a couple days later to say they couldn't secure financing. Who's the lender for those couple of days? – The Photon Sep 4 '18 at 1:00
  • Not sure if this applies to 100% of those cases, or only the majority, but.... the car hasn't been sold yet, the dealer does still own the car, and the purchaser is driving it as a "loaner" (secured by the down payment) until the paperwork is finished up resulting in a genuine sale. – Ben Voigt Sep 4 '18 at 1:02
  • @BenVoigt, fair enough. Re-worded. – The Photon Sep 4 '18 at 1:07
  • @ThePhoton The Question asked might be looking at Buy Here Pay Here dealerships for people with sub-par credit en.wikipedia.org/wiki/Buy_Here_Pay_Here – Halfwarr Sep 4 '18 at 6:23

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