Dealer finance vs a car loan

October 24, 2017
Melinda Halloran

You know that new car feeling? It’s even better when you know you’ve got the best deal on your car loan. Here’s what you need to know before borrowing money to purchase a new car.

Whether you want to upgrade to something a little more comfortable or you need space for a growing family, there are all sorts of reasons for purchasing a new car. And with everything else going on in your life, you may not be able to save up the money to purchase a car outright.

That’s where a source of finance comes into play. But should you take out a loan or speak to your dealer?

To answer that question, let’s start by looking at the differences between the two: 

  • Dealer finance is convenient, as it’s organised by your car dealer. It is common for car dealers to advertise very competitive interest rates and this type of finance often has a balloon payment at the end (more on that below).
  • Car loans are a personal loan taken out through a bank or other financial institution. Shopping around for a car loan gives you the flexibility to find a loan with terms that work for you, ensuring you can make repayments within your budget.

Making the best choice means focusing on the details. 

Dealer finance: The details 

Dealer finance is attractive for a number of reasons. Firstly, it is convenient. Accessing dealer finance allows you to purchase your car and sort out the money all in one place. Secondly, dealers often advertise very low interest rates. 

The flipside of this is that using dealer finance gives you less bargaining power when purchasing your car. When you walk in with enough money for your vehicle, you are in a better position to negotiate a good deal on the car. You also miss out on the ability to shop around for a loan with features and repayment options that suit you. 

The other thing to look at when it comes to dealer finance is the numbers. Low-interest finance deals don’t always work out in your favour. So that the dealer makes their money back in some way, they may offer you a lower trade-in price for your old car, or stipulate a number of terms and high fees for repaying the loan early. If you are considering using dealer finance, make sure you compare the offer from your dealer with similar vehicles.

You may also find that your finance has a balloon payment – this is a large lump sum payment that must be made at the end of your loan (it may be anywhere from $2,000–10,000). These payments are designed to reduce the amount of interest you pay, but if you can’t save the money for this, you will need to refinance this amount. In this situation, the interest may be higher than your original source of finance, meaning you pay more in the long run.

Questions to ask about dealer finance:

  • What are the repayment terms?
  • Are there any early exit fees?
  • How much will I pay over the life of the loan, including fees?
  • Is there a balloon payment and what are the terms of this?
  • Can I make extra repayments?

Car loans: The details

To use a loan to buy a car, you can either take out a personal loan or a secured car loan. You can choose between fixed and variable interest rates and speak with your lender about structuring the length of your loan and repayments. A secured loan allows you to use a new car as security against the loan, which lowers your interest rate.

A key advantage of using a car loan over dealer finance is that you have the power to shop around for the best deal. Before you settle on a loan, you should look at a variety of different lenders to get a feel for the different loans and current deals on the market on interest rates.

If you already have a home loan or another personal loan, you can look at consolidating the debt into a single loan. This streamlines your repayments and look for a better interest rate while you are at it. 

Finally, ensure you have pre-approval on your loan before you visit a dealer, so that you are ready to negotiate if you find a car you like. 

Questions to ask about your car loan: 

  • How long is the loan?
  • Can I make extra repayments?
  • Are there any early exit fees?
  • How much will I pay over the life of the loan, including fees?

My car loan service has proven so popular we are now also offering a car buying service that saves you from having to haggle with a dealer. See how it works in the video below. – Trevor 


Related: How to increase your borrowing power


Posted in: Car loans & leasing

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