Auto financing is a booming industry, these days, and everybody wants the opportunity to help you buy a new car. Among those lenders is your local credit union … and don’t be surprised if they start aggressively looking for your business. But should you take a loan from a credit union?
Credit Unions And Dealerships
Credit unions are actually heavily involved in your local dealership already, most likely. Most dealerships, especially independent ones, tend to work with one lender to provide direct financing. It’s not an uncommon arrangement, but many credit unions have found that as car loans have grown that auto lending is becoming a major part of their business.
Another factor that is pushing credit unions more and more in auto financing is that, simply, credit unions need members to operate. Many credit unions have found strong membership growth due to auto loans, and as people work with the union to pay off their cars, they’ll tend to sign on for other financial services as well, such as checking accounts, or take out other loans.
Still, despite the seeming benefits for all involved, some are concerned about credit unions becoming more involved in auto financing. Not least because, they argue, sometimes the auto financing is better for the credit union and the dealership than the consumer.
A Sweetheart Deal
At issue is how these loans are packaged and sold. Currently, many local credit unions have arrangements with dealerships where they’ll provide or secure loans for them, in exchange for what’s called “dealer reserve,” a small amount of interest added to your loan as a fee for the dealership. These are generally called “indirect” loans, as the consumer goes through the dealership to secure them.
Dealer reserve is controversial among consumer advocates and some parts of the auto financing industry, as the dealership and credit union are under no legal obligation to disclose this fee. Many do, simply as a matter of good business, but it does mean you may be paying more for your car than you would from another lender. Other dealerships will instead ask you to pay a flat fee for arranging financing, which is generally disclosed when talking about getting a loan.
So what does this mean for consumers? First of all, it means that when shopping for auto financing, you should visit your local credit unions to see what they can offer you. After all, they’re looking for your business, and you may be able to secure a better deal than you might find elsewhere.
Secondly, though, it’s a reminder that comparison shopping is a crucial part of the auto financing process. Simply put, you should gather as many quotes as possible from as many sources as possible and look at how those loans will affect your finances, long-term. You should also check up on who’s offering the loan, just as a matter of course, to see if you want to do business with them.
And, most importantly, remember to always ask questions of any lender, whether it’s a credit union, your dealership, or an alternative lender. Have them break out fees and costs, and where the money from each goes. Understanding what you’re paying for is, in the long run, going to be what saves you the most money.