What’s the difference between a car loan and dealer finance?

Buying a new car can be both exciting and stressful. Here is dealer financing, versus car loans, compared with loans.com.au.
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Unless you’ve got a big pile of cash to spend directly on a new car, you’re probably going to have to finance your new purchase somehow. Two popular options are dealer finance and car loans, but what should you be mindful of? The difference could mean thousands of dollars left in your pocket over the life of the loan.

Dealer Financing vs Car Loans

The main differences lie in cost, convenience and flexibility. Upon walking into a dealership, a friendly person greets you and runs your mind ragged with fast talking and a slick sales pitch. When you’re closing in on a new - or used - car, you’ll likely hear about the dealership’s car financing options.

Convenience

The way dealer financing works is the dealership usually has a third-party financing arm underwriting the loans, and they can be finalised while you’re on the showroom floor picking up your new ride. Manufacturers also often have financing arms, such as ‘Toyota Finance’, but these are also often underwritten by large financing conglomerates.

However, if you go your own route with a car loan, you might not experience any extra hurdles. Many car financing options these days - including loans.com.au - offer a car loan pre-approval process, which allows you to get approved for a certain amount of money, and then go out to shop armed with the power to negotiate. This can give you peace of mind and might not make breaking the budget as tempting!

Dealer financing can be tempting, especially with the way the dealer or associate has pitched it as convenient, but like a fast food combo meal ordered via drive-thru, it might not be the healthiest option.

Cost

You might not know this, but dealers often make very little money on the car sale itself. It’s the extras where they make the profit. Anything from the window tint to the dealer financing can be sold at huge markup.

As the dealer can package convenience as a selling feature, and the car buyer doesn’t have time to compare their options, the interest rate on dealer financing could be lacklustre. However, if the advertised interest rate looks competitive - 0% or 1% dealer financing is a common trope - the devil is in the detail.

  • It’s worthwhile looking at the comparison rate. The comparison rate takes into account any extra fees that are applicable. So, the advertised rate might be 1%, but the comparison rate could be over 5% by the time fees are taken into account.

Also look at how the dealer arrived at 0% or 1% finance - does this include a compulsory balloon payment, which could be 30% of the car’s value or more at the end of the loan? Or does the loan revert to a much higher interest rate after a year or two? This might not be something you’re willing to swallow, which takes us to the next point.

Flexibility

From a compulsory balloon payment, to abiding by the car dealership financier’s rules, dealership finance could - but not always - be a less flexible option. If you’re signing on the dotted line of the dealer financing contract, it’s important to read through its product disclosure statement. You might find a few surprises, such as:

  • Balloon payments: Dealer financing with the most competitive rates might require a balloon payment of 30% or more at the end of your term. This is usually optional with car loans. This means that as you’re winding up your loan, on a $30,000 car you might need to pay $9,000 of it at the end, which could come as a nasty surprise.

  • No extra repayments: Dealer financing might not allow any extra repayments, which allow you to get ahead if you’ve got the cash. Additionally, there might be a fee for paying off your loan early.

  • Longer loan terms: While this is applicable for any loan type, the longer the term, the lower your monthly payment might be, but the more interest you’ll pay in the long run.

Additionally, dealership financing’s most obvious restriction is in the name - you’re usually stuck with financing cars that are on the showroom floor. This usually restricts your car buying options to new cars or used cars only a few years old. While mainstream lenders might also have such restrictions, if you shop around and compare interest rates, there are many car loan options to suit any type of car you want to buy.

Looking to hop into your new car sooner? Speak with one our friendly lending specialists today to get pre-approved for a car loan today.

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