What's the deal between the bank and the dealer when you finance your car loan with your bank?

Question

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.

Answer 1

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.

Answer 2

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.