Many Australians choose to buy their car at a dealership, with finance often offered as part of the package. Dealer finance can be convenient, but it’s not the only option available. If you’re buying a car, it’s worth comparing car loans separately before you sign to find the most suitable deal for your situation.
How is dealer finance different from standard car loans?
Dealer finance works in much the same way as any other car loan: you borrow money to buy the vehicle, then repay the loan with interest and fees over an agreed term.
| Dealer finance | Standard car loan | |
|---|---|---|
| How it's arranged | Offered through the dealership when you buy the car | Arranged separately through a lender or broker |
| Interest rate | May be advertised with low promotional rates, though these can come with conditions | Rate depends on the lender, your credit profile, the vehicle and the loan structure |
| Balloon payment | Often required as part of the finance offer | Optional |
| Vehicle choice | Finance is tied to the car you are buying from that dealership | Can be used to finance eligible new or used cars from a dealer or private seller |
| Loan term | May have shorter term limits, such as three to five years | Lenders may offer terms up to seven years |
| Add-ons | Extras such as extended warranty, servicing, paint protection, fabric protection or window tinting may be bundled into the finance | Add-ons are usually separate from the loan unless you choose to include them |
The pros and cons of dealer finance
Pros
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Quick and convenient
You can organise the car and finance through the dealership, which can feel simpler if you want everything handled in one place.
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Dealer support with the application
The dealership can help prepare and submit your finance application, which may make the process feel more straightforward.
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Promotional rates may be available
Some dealerships offer low advertised interest rates or manufacturer-backed finance deals, especially on selected new cars.
Cons
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The deal may be less flexible
Dealer finance is usually tied to the vehicle and lender options available through that dealership, which may limit how widely your loan is compared.
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Low rates may come with conditions
A low advertised rate may only apply to certain models, loan terms or repayment structures. It may also come with a balloon payment, high fees or less room to negotiate on the car price.
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Extras can increase the total cost
Accessories, warranties, protection products or add-ons may be rolled into the finance, meaning you could pay interest on them over the life of the loan.
The pros and cons of car loans
Pros
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More room to compare
A car loan gives you the ability to compare lenders, rates, fees, repayment options and loan terms before you choose.
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More choice in what you buy
Provided the vehicle fits the lender’s criteria and your borrowing power, you’ll be able to buy new or used, from a dealer or private seller.
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Shop with a clearer budget
Getting pre-approved for a car loan can give you a clearer idea of how much you may be able to borrow before you visit a dealership. This can help you focus your search and approach the dealership with more confidence.
Cons
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You’ll need to organise finance separately
Unlike dealer finance, the loan is not handled at the same time as the car purchase, so you’ll need to arrange your loan separately before you buy.
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Comparing options can take time
If you compare lenders yourself, it can take time to review rates, fees and loan terms. Using a broker can reduce the legwork.
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Add-ons are not bundled into the sale
If you want accessories, warranties or other extras, you’ll need to arrange those separately rather than having the dealership bundle them into one finance package.
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. A lower advertised interest rate does not always mean a car loan will suit your budget, so it’s important to look at the full structure of the deal.
The key costs to check include:
- Interest rate: the rate charged on the amount you borrow. Some dealer finance offers advertise very low rates, but they may only apply to selected vehicles or shorter loan terms.
- Comparison rate: this gives you 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 interest you may pay over the life of the loan.
- Loan term: how long you have to repay the loan has an impact on the overall cost. A shorter term may reduce total interest, but it can also make monthly repayments much higher.
- Balloon payment: a balloon payment is a lump sum due at the end of your loan. While it can reduce your monthly repayments, you’ll end up paying more interest overall.
Let’s look at a buyer who wants to buy a Ford Everest priced at $60,000.
The dealership offers finance with a low advertised interest rate of 3.00% p.a. However, the comparison rate is 12.00% p.a., the loan term is limited to three years and the deal includes a 20% balloon payment, meaning the buyer would need to pay $12,000 at the end of the loan term.
The buyer also speaks to a broker and is pre-approved for a standard car loan. This loan has a higher advertised interest rate of 7.00% p.a., but a lower comparison rate of 8.00% p.a. over five years, with no balloon payment.
Here’s how the costs would work out:
| Dealer finance | Standard car loan | |
|---|---|---|
| Car price | $60,000 | $60,000 |
| Advertised interest rate | 3.00% p.a. | 7.00% p.a. |
| Comparison rate | 12.00% p.a. | 8.00% p.a. |
| Loan term | 3 years | 5 years |
| Balloon payment | $12,000 | $0.00 |
| Monthly repayment | $1,714 | $1,217 |
| Total repaid | $73,714 | $72,995 |
| Total interest and fees | $13,714 | $12,995 |
| Calculations are for illustrative purposes only and actual costs can vary depending on factors like your credit score, lender specifics and dealership promotions. | ||
Although the dealer’s advertised rate is lower, the fees built into the loan push the true cost higher. The non-dealer option works out around $497 per month cheaper and saves $719 overall, with no balloon payment to budget for at the end of the loan.
5 car dealership finance traps
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Guaranteed future value (GFV)
Guaranteed future value, or GFV, is the amount your dealer says your car will be worth at the end of the finance term. If you want to keep the car, this is usually the amount you need to pay. If you trade it in, it is the value used by the dealer.
GFV can give you some certainty, but the figure may be lower than what you could get by selling the car privately. It is also usually tied to a kilometre limit, so going over that limit could reduce the value or leave you paying extra fees.
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Trade-ins
Trading in your old car can be convenient, but it may not get you the best price. Some dealerships may offer less than what you could receive through a private sale, which can leave you paying more overall.
Before agreeing to a trade-in, compare the offer against the car’s private sale value so you know what the convenience is costing you.
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Paying a deposit before finance is approved
Some dealerships may ask for a deposit before your finance is fully approved. While deposits may be refundable in some cases, getting your money back can still be frustrating if your loan application falls through.
Before paying anything, check whether the deposit is refundable, when it can be refunded and whether any conditions apply.
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Financing accessories
Dealerships may offer accessories such as tinting, paint protection, mats, tow bars or roof racks as part of your finance package. This can be convenient, but it also means you may end up paying interest on those extras over the life of the loan.
Before adding accessories to your finance, compare the upfront cost with aftermarket options and consider whether they are worth paying interest on.
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Warranty conditions
A longer warranty can offer peace of mind, but it is worth checking the fine print. Some warranties require the car to be serviced through the dealership or approved service network to remain valid.
That may mean giving up your preferred mechanic or paying more for servicing. Before relying on the warranty, check what is covered, how long it lasts and what servicing conditions apply.
Dealer finance or a car loan: which is right for me?
Dealer finance can be quick and convenient, especially if the dealership is offering a promotion on the vehicle you want. If you’re buying from a dealer and want the car and finance sorted in one place, it's often the easier option.
However, convenience shouldn’t be the only factor, and you shouldn’t feel pressured into a finance deal that doesn’t fit your budget or needs. Take the time to check the rate, comparison rate, fees, loan term, balloon payment and total amount payable before you sign. If you’re not happy, look elsewhere.
A car loan arranged through a lender or broker gives you more room to weigh up your options and help you find finance that is affordable, flexible and suited to your circumstances. Getting pre-approved before you visit a dealership also puts you in a stronger negotiating position, since you already know what you can borrow.
