How do you finance a car purchase? The most popular options are car loans or dealership finance. Although similar, they have key differences that can affect your finances and overall car buying experience.
Car Loans vs Dealer Finance: Which is better?
A car loan is a type of finance solution where you receive funds to purchase the vehicle, either new or used, from a lender. After making the purchase, you would pay back the money borrowed plus interest over an agreed-upon timeline.
Car loans come in various types, like secured or unsecured; however, some lenders may only offer secured car finance. Interest rates and features also vary depending on the lender and their borrower criteria.
Meanwhile, dealership finance is a loan offered by a car dealership. When you buy a car at a dealership, you can finance your purchase directly through them. This means the car dealership will arrange the financing for you, so you don’t have to go to a third party. The mechanics of a dealership’s finance and car loans are similar in nature but have distinct features.
| Car Loan | Dealer Finance | |
|---|---|---|
| Interest rate | Varies depending on the lender, allowing you to find more competitive rates. | May offer lower interest rates but higher fees. Lower rates may be limited to certain makes and models. |
| Loan term | May be up to seven years. Loan terms may vary depending on borrower preference. | Between three and four years. |
| Loan features | Optional balloon payments, redraw facilities, and free early payment. Features vary by lender. | Typically has a compulsory balloon payment attached. |
| Fees | Application fee, late payment fees, early exit fees, monthly fees. | Application fee, dealer agency fee, late payment fees, early exit fees. |
| Repayment frequency | Monthly, fortnightly, or weekly, depending on your agreement with the lender | Monthly. |
| Advantages | Lenders may offer more competitive rates and greater flexibility to customise your loan. | Usually more convenient because you can purchase your car and get finance at the same place. |
| Disadvantages | Shopping around for the best loan may take time, with potentially little room for negotiations. | Limited vehicle options and less competitive rates. |
What should you know when getting a car loan?
Applying for a car loan requires a bit more legwork than getting financing from a dealership. It’s important to review your credit score, gather the necessary documents, choose the right loan type, and find a good lender.
Because it takes a bit more effort, it’s best to review the pros and cons carefully.
Pros of using a car loan
- More competitive rates: If you have a good credit history, you are more likely to secure a sharp interest rate that is more manageable on repayments and lowers the total amount of interest paid over the life of the loan.
- Flexibility: Choosing your own lender usually allows for more flexibility to tailor your loan to you. Whether that’s opting for a balloon payment, loan terms from 3 to 7 years, extra repayments and more. Many lenders also offer car loan pre-approval, so you know what type of budget you’re shopping around with before you start the car buying journey.
- Choice: The world is your oyster when it comes to car loan lenders. As opposed to a dealer, which usually only offers finance through one company, there are many companies in the wider market for you to choose from and secure a competitive rate.
Cons of getting a car loan
- Less convenience: Car loan applications require slightly more work on your end, as the lender doesn’t do it for you. The result, however, could be worth it. Car loans also require approval time, so you might not be able to find a car, finance a car, and drive off the lot all on the same day.
- Less negotiation: The rate your lender gives you is usually their best and final offer. You won’t be able to haggle with the lender, as their rates are based on internal factors and borrowing criteria.
What should you know when getting finance through a car dealership?
A car dealership finance may sound like the most convenient option. Since everything goes through the dealership, you don’t have to deal with other parties or submit multiple copies of the same document. But that convenience may come at a price.
Before taking out a car dealership finance, it’s best to learn about its benefits and drawbacks:
Pros of getting dealership finance
- Convenient: You can shop for a car, and usually the dealership is all too happy to sell you a loan and let you drive off the lot on the same day.
- Manufacturer Rates: Manufacturer finance (e.g., Toyota Finance) occasionally offers very low rates, but be sure to check the comparison rate and other fees and conditions.
- Negotiations: You have more room to negotiate rates and terms at a dealership. If you take out a loan through them, they might offer a better price on the car, plus throw in a few extra goodies like window tinting, but this relies on your negotiation skills!
- Options for borrowers with poor credit: Dealerships are often obliging when it comes to car buyers with poor credit history, but again, this convenience could come at a price with higher rates and more stringent terms.
Cons of getting dealership finance
- Vehicle restrictions: Many dealers only extend competitive finance to new vehicles, while used vehicles may get a higher interest rate.
- Watch the sales price: Because of offering everything in one neat package, it can be all too easy to gloss over the final details. Watch what you’re paying for, including an uncompetitive sales price.
- Less competitive rates: There’s no such thing as a free lunch. Dealers often get kickbacks from the financing company for facilitating the transaction, and the result is potentially a steep interest rate.
Which car finance options should you get?
It all depends on your situation and which finance solution best fits your needs. If you’re still unsure, our expert car loan brokers can help! At CarLoans.com.au, our goal is to find you the best deal possible on your car finance.
Our car loan brokers work with multiple lenders to secure competitive rates for you, which eliminates the need for you to shop around. Speak with one of our support agents today to find out how you can secure a great deal on your car loan. Call 1300 889 669 or get a free quote today!
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.