Although “car financing” and “car loan” sound remarkably similar, they refer to distinct concepts.

Knowing the difference between car financing and a car loan can help you as you begin the auto-buying process.

What is car financing?

Car (or auto) financing refers to securing the necessary money for a car purchase from a dealer. Here the dealer acts as an intermediary, working with multiple lenders (banks, credit unions, and manufacturer financing companies) to provide you with options.

Dealers often work with a wider range of credit scores, making it easier for those with less-than-perfect credit to get approved. However, this convenience can come at a cost. Interest rates offered through dealerships might be higher than those from direct lenders, and the loan terms might be less favorable. Dealer financing can be more convenient as it's often handled on-site, sometimes referred to indirect auto financing.

What is a car loan?

With a car (or auto) loan, you borrow money directly from a financial institution like a bank, credit union, or online lender. Once approved, you receive a lump sum to pay for the car, and then you make fixed monthly installments to repay the borrowed amount with interest over a set period.

Because you're dealing directly with the lender, you can often secure lower interest rates and more flexible loan terms. Going directly through a financial institution requires more legwork on your part. You'll need to shop around for rates and complete the application process before you even visit a dealership.

There’s an option out there for you

Both car financing and car loans get you behind the wheel, but they cater to different needs (easier approval vs. lower cost)

If the flexibility of obtaining car financing through a dealership appeals to you, Credit Acceptance works with over 15,000 dealers nationwide — and you can start the pre-qualification process today.