When it comes time to finance your vehicle, the loan options can seem as vast as the cars on the market. Do you finance at the dealership, go directly through a bank, or a credit union? While the interest rate and the loan terms should be the priorities, with car loans stretching out to an average of over 5 years, it’s also important that you're happy with the lender choice you make. J.D. Power did a study to determine whether going with direct or indirect financing offered the best experience. Understanding the findings will help guide you in your car own loan process.

Direct vs. Indirect Financing

Direct vs. indirect financing

The auto finance market is largely driven by the F&I office with most people going with the lender recommended by the dealership. J.D. Power wanted to know how satisfied customers were with this method and how it compared to going through credit unions or banks directly. Before getting to the results of the study, let’s define the meaning of direct and indirect financing. 

Direct Financing

Direct auto financing simply means getting an auto loan directly through a financial institution like a bank or a credit union. Shopping around and getting pre-approved from multiple financial institutions offer the benefit of comparing financing offers which put you in control of the process. Getting the best possible interest rate and loan terms can mean significant savings over the course of the loan. The biggest drawback is the legwork you need to put in to locate and apply through multiple lenders. Shopping for auto financing online can make the process easier. 

Indirect Financing

Indirect auto financing means the dealership steps in and serves as the middleman for your car loan. If you go with this route, the F&I (finance and insurance) office will be your last stop in the car buying process. The F&I manager takes your credit application and compares lenders that are a fit for you. Once they find a loan offer, they will present it to you. The drawback with indirect financing is that you're giving up some control in choosing the lender. The option that the dealership presents to you may work best for them but isn't necessarily in your best interest to accept. On the other hand, the benefit of this process is that it is a one-stop shopping experience and there is not much prep work to be done.

J.D. Power Auto Finance Survey Results

J.D. Power Survey

To find out whether direct or indirect financing methods provide a better experience, J.D. Power conducted a study that examined how satisfied customers were with their auto finance experience. The survey asked participants to reveal whether they did direct or indirect financing and then rate their experience based on multiple factors such as the billing and payment process, mobile app experience, onboarding process, origination process, and website experience.

The survey results looked at 13,787 respondents who financed or leased new and used vehicles in the last four years. The satisfaction results were based on a 1000 point scale. The final results came down to whether or not the car shopper felt in control of their financing experience and if they believed they chose the lender themselves.

Bank sign

The study found that 58% of car buyers did not shop around for financing ahead of time. This group averaged an overall satisfaction score of 833 out of 1000 and the majority went with a lender the dealership suggested. On the other hand, those that chose direct financing and went online to find a lender themselves scored an average of 867 out of 1000.

An interesting finding was from the third group of car buyers. These were the ones who shopped around for auto financing online prior to going to the dealership but ultimately went with the F&I manager’s recommendation. This group scored their satisfaction with the process at 857 out of 1000. The higher score compared to those that did not shop around can be attributed to this group being more involved in the lender decision even though the end result of going with the F&I lender is the same as the first group. Despite the fact that about 50% of the surveyed shoppers looked for lenders online prior to going to the dealership, 25% of this group still went the indirect route at the F&I office.

Which Financing Option is Right for You?

direct vs. indirect financing

Ultimately, car shoppers want to feel in control of their auto financing process. It is a lot of money, after all. When the dealership chooses a finance option for them, they feel like they may have missed out on better offers. However, the convenience of a one-stop shopping and financing experience through the dealership is hard to beat since it can be time-consuming to look up and get pre-approved for car loans. If your car purchase isn’t an emergency, we’d recommend shopping around for auto financing prior to going in to purchase your vehicle. This allows you to get multiple offers for interest rates that you can then take with you to the dealership when buying your car.

Once you’ve selected your vehicle and you are sitting in the F&I office, you can let the finance manager look for lenders and present the best offer to you. If it beats the numbers you got for your pre-approval you can proceed with their offer. If they come back with a higher interest rate, use your pre-approval as leverage and see if they can match or find something better. Getting multiple financing offers puts you in control and will help you feel more confident and satisfied in your choice of lender.

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