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How Loan Brokers and Direct Lenders Differ
Searching for a car loan lender can be quite time consuming, which is why loan brokers manage to keep busy. Rather than shop for the loan yourself, a loan broker is tasked with finding the best loan terms available to you – for a fee. This differs from direct lenders considerably. A direct lender has the authority to make the loan to you, while a broker does not. Banks and credit unions are examples of direct lenders, while car dealers usually employ a broker. Bank car loans may be tougher to secure than a car dealer loan. Before you sign on the dotted line, understand the differences between the types of people you may encounter. It could save you money on the deal.
Loan Brokers
Loan brokers, first and foremost, are not loan agents. They are not empowered to give you a loan to purchase a car. A loan broker’s job consists of weeding through the terms of loans offered by different lenders in order to find you the best one. Loan brokers must possess a broker license, just as a loan agent must be accredited. However, loan brokers often work for a car dealership and may not be as impartial as you think.
If a loan broker works for a car dealer (as many of them do) they have an incentive to offer you financing through their preferred lenders. Car dealerships often have arrangements with a particular lender. It may be the lending company of a car manufacturer or not, but this can be both costly and beneficial. On the one hand, a captive borrower may think they’re getting all of their options laid out before them, when in fact the lender is already in place. Dealers will, however, attempt to move certain makes and models, especially if the finance agency is offering lower interest rates or factory rebates. Another possible cost, though, is the fee charged by the broker. A point or more is often added to the interest, not as a reflection of your credit score, but as profit to the dealership and broker. Rather than pay a one-time fee, you end up being saddled with a recurring fee.
Direct Lenders
A direct lender is an agent empowered to offer you a loan for a car purchase. Banks, credit unions and online lenders are examples of direct lenders. They differ from brokers in that they will not theoretically offer you many rates to choose from. They’ll only offer one, which is theirs. Although you will have to search around for the lender offering the most favorable terms, they don’t have the incentive to add to your interest rate. Fees are common and should be expected, but they don’t work for a car dealer and thus have no overriding interest. You would do well to search around for the best rate from different lenders.
Direct lenders differ from loan brokers in what they do. Whereas direct lenders have the authority to offer you a loan on their terms, loan brokers go through different lenders to find you the best rate. If you want to use a broker because you don’t have the time to search yourself, hire a broker who does not work for a car dealership. That way, they will be more likely to be impartial in their search.
