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Choosing how to finance your car can be a big decision. Here's a breakdown of car loans vs dealer finance to help you navigate your options.
How do car loans differ from dealer finance?
Car loans and dealer finance are two common methods of financing a vehicle purchase, each with its own distinct characteristics.
A car loan, typically obtained through a bank or online lender, involves borrowing a specific amount of money to purchase a vehicle that the buyer has chosen separately. The borrower then repays the loan amount plus interest over a predetermined period, usually in monthly instalments. Car loans offer flexibility in terms of the lender and the terms of the loan, allowing borrowers to shop around for the best rates and loan terms that suit their financial situation.
On the other hand, dealer finance, also known as dealership financing or in-house financing, involves obtaining financing directly through the car dealership where the vehicle is purchased. Instead of working with a separate lender, the buyer applies for financing at the dealership. The dealership acts as an intermediary between the buyer and the lender, facilitating the loan application process and offering various financing options. Dealer finance can offer convenience and expedited processing, but it may also come with higher interest rates compared to loans obtained through traditional lenders.
What are the pros and cons of car loans vs dealer finance?
Car loans
Pros:
- Lower interest rates: generally, car loans offer more competitive interest rates, especially for those with good credit. This can save you a significant amount of money over the loan term.
- More flexibility: you have more control over the loan terms. You can shop around with different lenders, compare interest rates and loan lengths, and choose the option that best fits your circumstances and budget.
- Vehicle choice: with a car loan, buyers have the freedom to shop for vehicles from various sources, including dealerships, private sellers or auctions.
- Stronger negotiation position: having pre-approval for a car loan gives you leverage when negotiating the final price with the dealership.
Cons:
- Requires research and effort: you'll need to invest time in researching lenders, comparing rates and potentially applying for pre-approval.
- Less convenient: the car buying process may take longer compared to dealer financing, as you'll need to secure a loan before finalizing the car purchase.
- Down payment: many lenders require a down payment, which can be a barrier for some buyers.
- Limited negotiation: car loans from independent lenders typically offer less room for negotiation on interest rates and terms compared to dealer finance.
Dealer finance
Pros:
- Convenience: financing can be arranged quickly and easily at the dealership, often while you're selecting the car – in essence, a one-stop shop.
- No need for pre-approval: you don't have to go through the hassle of pre-qualification with a separate lender.
- Quick approvals: dealer financing approvals can sometimes be quicker than traditional loans, which can be beneficial if you need a car quickly.
- Trade-in assistance: dealerships can often streamline the process of trading in your old car when financing through them. They may handle the paperwork and appraisal, making it a more convenient experience.
Cons:
- Higher interest rates: interest rates offered by dealerships can be higher compared to car loans, especially for borrowers with lower credit scores.
- Limited options: buyers may be limited to financing options offered by the dealership's affiliated lenders, restricting their ability to shop around for the best rates and terms.
- Pressure tactics: dealerships may use aggressive sales tactics to promote dealer finance, potentially leading buyers to accept less favourable terms than they would with independent lenders.
- Unnecessary add-ons: dealerships may try to push additional products like extended warranties or gap insurance during the financing process. Be cautious and only opt for what you truly need.
How much will my car loan cost vs dealer finance?
Before taking out a car loan or dealer finance, it’s important to understand all the potential costs involved. Beyond the loan amount itself, you also need to consider factors such as:
- Interest rate: the percentage you're charged on the borrowed amount to repay the car loan over time.
- Comparison rate: the true cost of the car loan including the interest rate and any additional fees.
- Repayment period: the total length of time (months or years) you have to repay the car loan in full.
While car dealerships may offer lower interest rates initially, it's essential to scrutinise the fine print as they could incorporate hidden fees to compensate.
Here is an example of two car loans, one through a car loan broker like Savvy and one with dealer finance, for a $30,000 car to be paid over over a five-year period:
| Car loan | Dealer finance | |
|---|---|---|
|
Interest rate |
5% |
4% |
|
Comparison rate |
5.5% |
7% |
|
Monthly repayment |
$573 |
$594 |
|
Total interest and fees |
$4,380 |
$5,640 |
|
Total cost of car |
$34,380 |
$35,640 |
As this example shows, 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.Â
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% car loan?
A 0% car loan, also known as zero percent or interest-free financing, is a financing option where borrowers can purchase a vehicle without paying any interest on the loan amount. Unlike traditional loans offered by banks or lenders, 0% car loans are typically provided by car manufacturers or dealerships as promotional offers to stimulate sales. These deals may be offered on specific car models or during promotional periods and are aimed at attracting customers by eliminating the cost of borrowing money.
At first glance, 0% financing can seem highly attractive, as it allows buyers to avoid paying interest charges, potentially saving them a significant amount of money over the life of the loan. However, there are important factors to watch out for:
- Dealerships may inflate the purchase price of the vehicle to compensate for the lack of interest, potentially negating the savings from the 0% loan.
- 0% finance deals often come with short interest-free periods, after which the loan may revert to a higher interest rate, increasing the overall cost.
- Borrowers may be required to make a large final payment, known as a balloon payment, at the end of the loan term, further adding to the total expense.
It's therefore crucial for buyers to carefully review the terms and conditions of a 0% car loan and consider all associated costs before making a decision.
How can I get the most out of my car finance?
Navigating car loan options can feel overwhelming but following some key steps can help you get the most out of your car finance and avoid any hidden pitfalls. Here are some tips to help you secure the best deal and save money in the long run:
Before you finance:
- 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 rely on dealer financing. Compare rates from a range of lenders to find the best deal.
- Consider a larger down payment: a larger down payment reduces the amount you need to borrow and lowers your monthly payments. It can also improve your chances of getting approved for a loan.
During the financing process:
- Understand the loan terms: carefully read and understand the loan agreement before signing. This includes the interest rate, loan term, repayment schedule, any prepayment penalties and any additional fees.
- Avoid extras you don't need: dealerships might try to push add-ons like extended warranties or gap insurance during financing. Only opt for what you truly need.
After securing the loan:
- 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 terms allow it, paying off the loan early can save you money on interest.
- Refinance if rates drop: if interest rates drop significantly after you get your loan, consider refinancing to a lower rate.
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.
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Bill TsouvalasFact checked
This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
