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Reviewed by How is dealer finance different from standard car loans?
Dealer finance is simply the name for the loan your dealership offers you when you buy your car. They function in pretty much the same way as any other regular car loan (secured loan, borrow lump sum, repay with interest and fees over a set period), but there are a few notable differences:
- Dealer finance is often advertised with lower interest rates (sometimes as low as 1.00% p.a. or even 0% p.a.), though these may only apply to certain makes and models
- While uncommon on most car loans, dealer finance will usually require you to include a balloon payment (lump sum to be paid at the end of the loan)
- In many cases, your dealer won’t offer finance for used cars, instead saving these offers for brand-new models
- You may not be able to take as long to repay your dealer-financed loan, with caps of three to five years instead of the seven that many lenders offer
- Your dealer may offer other inclusions, such as extended warranty, free or discounted servicing, fabric protection or window tinting (though you’ll need to consider whether these are worthwhile add-ons)
It’s worth noting that the add-ons in the last point are where dealerships make most of their money, not from the sale of the car itself. For this reason, you may find that sales reps encourage you to add these to your finance package, so be sure to cast a critical eye over how useful they really are.
The pros and cons of dealer finance and car loans
| Dealer finance | Car loans | |
|---|---|---|
| Pros |
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| Cons |
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How much will my car loan cost vs dealer finance?
Before buying your car, it’s important to understand all the potential costs involved, whether you’re taking out dealer finance or a loan through a bank or another lender. Beyond the loan amount itself, you also need to consider factors such as:
- Interest rate: the percentage you're charged on the amount borrowed to repay the car loan over time.
- Comparison rate: the “true” cost of the car loan, including the interest rate and any additional fees like establishment and monthly charges.
- Loan amount: the more you borrow, the more you’ll end up paying in interest overall.
- Repayment period: the total length of time (months or years) you have to repay the car loan in full.
Here is an example of two car loans, one through a dealer and the other through a car loan broker, for a $30,000 car to be paid over a four-year period:
| Dealer finance | Car loan | |
|---|---|---|
|
Interest rate |
3.00% p.a. |
6.50% p.a. |
|
Comparison rate |
8.00% p.a. |
7.50% p.a. |
|
Monthly repayment |
$733 |
$726 |
|
Total interest and fees |
$5,155 |
$4,818 |
As you can see, although the dealer offers a lower initial interest rate, the additional fees involved push up the overall cost of the loan, making it more expensive than the car loan found by the broker.
It's important to note that these are estimates and actual costs can vary depending on factors like your credit score, lender specifics and dealership promotions.
Should I consider a 0% p.a. car loan?
0% p.a. finance offers are often advertised by dealerships and car manufacturers. As the name suggests, this means you’ll be taking out a loan and not paying any interest for a specified period.
At first glance, 0% p.a. financing can seem highly attractive, as it looks like it’d save you a massive amount over the life of the loan. However, there are a few things to keep in mind:
- Dealerships may inflate the purchase price of the vehicle to compensate for the lack of interest, which could partly or entirely cancel out the savings from the 0% p.a. loan.
- Some 0% p.a. loans come with short interest-free periods, after which the loan reverts to a higher rate.
- 0% p.a. interest doesn’t mean 0% p.a. comparison rate. When you factor fees into your loan, you’ll find you’re paying much more than you’d think.
- These rates are available for applicants with strong profiles, not just anyone. If your credit report isn’t perfect, you’re unlikely to be approved for the basement rate.
That’s why it’s essential to read the fine print on not just a loan through your dealer, but any loan agreement you’re about to sign. Understand how the interest on your loan works so you can be clear on exactly what you’re paying for.
How can I get the most out of my car finance deal?
Let’s take a look at a few simple steps you can take to maximise your comfort and savings on your loan deal, all the way through the process:
Before you apply:
- Improve your credit score: a higher credit score qualifies you for lower interest rates, saving you money in the long run.
- Shop around: don't just apply for the first deal you find. Compare rates from a range of lenders to give yourself the best chance of finding a great deal.
- Consider a larger down payment: a bigger deposit reduces your loan amount and monthly payments. It can also improve your chances of getting approved for a loan.
During the application process:
- Understand the loan terms: always read and understand your loan agreement before signing. Doing this helps you avoid any unwanted surprises when it comes to your fees and interest down the track.
- Avoid extras you don't need: think carefully about whether you actually want the add-ons your dealer is trying to sell you. Err on the side of caution and save money if you aren’t sure.
After you’re approved:
- Make payments on time: a consistent payment history helps maintain a good credit score, which can benefit you in the future.
- Consider early repayment: if your loan agreement allows it, paying off your loan ahead of schedule can save you a considerable amount on interest (as long as you don’t have to pay hefty early termination fees).
- Refinance if rates drop: if interest rates drop significantly after you get your loan, consider refinancing to a lower rate (again, provided you won’t be slugged with early termination fees for doing so).
Remember, don't be pressured into a financing deal that doesn't fit your budget or needs. Take your time, do your research and prioritise getting the best possible rate and terms for your car loan.
So, which option is better for me?
The best option for you might be different from the next person. For example, if you need a quick and easy solution and don’t have the time to do all the work yourself, you might lean towards finance through a dealer. If you want to buy a car from a private seller or avoid a balloon payment, going to a specialist lender may be the better option for you.
What doesn’t change, though, is that the best thing you can do is compare a range of quotes before you settle on your loan. Doing this means you can be more confident that the deal you choose is the most suitable and affordable for your circumstances.
It also pays to ask questions. If you find an offer through a dealer that seems far cheaper than what you’d receive from a bank, be sure to study the terms and conditions of the deal before you sign off on it.
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