Article published 24 November 2020
The holiday season isn’t just a favourite for Santa. Motorists know it can also be a good time to pick up a bargain on a new car as dealerships are keen to move current year stock before the latest models arrive. During this busy time, saying ‘yes’ to dealer finance can seem like an easy option, but convenience often comes at a cost.
Dealers can be light on the details
Plenty has changed in the world of car buying. In the past, offering to pay cash was often rewarded with a generous car-yard discount. Not so these days.
Dealerships know that by providing in-house finance they can get two bites of the cherry – a profit on the sale of the vehicle, plus interest or commission earned on car finance.
It goes a long way to explaining why ‘the finance guy’ is a regular fixture of car yards these days.
The problem is that while dealers are very good at discussing vehicle specifications, they tend to be light-on when it comes to explaining the nitty gritty of car finance.
The hidden costs to watch for
Rather than being upfront with the interest rate, dealer finance tends to focus on the weekly repayments you’ll make on a new car. It’s up to you, the buyer, to really drill down and ask about the rate so that you get a true idea of the cost of finance.
Even then, you may not have the full picture. Dealer finance can be structured very differently to a regular car loan. Read the fine print, and you could find there’s a ‘balloon’ payment involved.
The balloon is a lump sum payable at the end of the loan term, and it can be worth around 30% of the original loan amount. It’s this payment that allows dealers to keep the regular repayments low. But it can be dispiriting, and financially challenging, to discover that after years of paying off the vehicle, you still owe a lump sum of cash. Worst case scenario, the balloon can exceed the car’s market value at the time when the payment falls due.