If you are buying a car and want to borrow the money to pay for it, you have the options of (1) going directly to your bank or credit union and getting preapproved for a loan in a certain amount and with a certain interest rate, or (2) going to the car dealership and inquiring about dealer-arranged financing. One difference in these options is that with dealer-arranged financing the dealer may negotiate a higher interest rate with you than the bank offers, and take the additional money you pay in interest as compensation for the dealership. But if you are purchasing a new car, the car dealer may offer you lower interest rates than your bank or credit union.

In South Dakota, when financing a car purchase, consumers can either obtain a loan directly from a financial institution like a bank or credit union, or they can opt for dealer-arranged financing. With a direct loan, the consumer gets preapproval for a specific loan amount and interest rate before purchasing the vehicle. This option allows the consumer to know the terms of the loan in advance and can provide bargaining power at the dealership. On the other hand, dealer-arranged financing involves the dealership acting as an intermediary between the buyer and the lender. The dealership may negotiate the loan on the buyer's behalf, but it's important to note that the dealer may also mark up the interest rate to receive a portion of the finance charges as compensation. This could result in a higher interest rate than what the consumer might get directly from a bank or credit union. However, dealerships sometimes offer promotional financing rates, especially for new cars, which can be lower than those offered by banks. These promotions are often supported by the car manufacturer's finance arm and may be contingent upon the buyer having a strong credit rating. Consumers should compare the total costs and terms of both options to determine the best financing solution for their situation.