Dealer finance car loans vs regular car loans
Without enough money under the mattress or cash in their savings pot, most Aussies turn to finance to get their new wheels on the road. Once in the driving seat, a borrower typically repays the funds over time – between 1 and 7 years – including interest and other charges.
If you’re also ready to sign up for this arrangement, your financing options include dealer finance car loans and regular car loans. Choosing the right financing is important to avoid getting ripped off or being locked in an undesirable debt situation. Keep reading for an easy breakdown of what to consider to ensure you’re getting the best deal.
Car loans vs dealer finance: What’s the difference?
Dealer finance
Dealer financing is a car loan that’s set up by your dealership. The dealer goes through the lender and does all the legwork and paper pushing so you can hit the road quicker. In the past, dealer finance might have earned a bad rep because of money-hungry salespeople who convinced buyers to sign up for high-interest loans even when they had a squeaky clean credit history.
But since ASIC’s 2018 ban on flex commissions, dealers can no longer increase the rates offered by their lender partners. Now, dealer finance is more likely to offer lower rates than car loans under certain conditions. Balloon payments are also a regular feature of dealer finance that shrinks your repayments. You later make up for this difference with a lump sum payment at the end of the finance period.
Generally, if you’re applying for a loan with dealerships such as Nissan Finance or Toyota Finance, the purchased vehicle acts as security against the loan. Defaults, therefore, lead to repossession.
Car loans
The lump sum you receive from a car loan is also secured, so you get to drive the vehicle as long as you keep pace with your repayments. You can also use an unsecured personal loan to buy an auto, but such deals generally offer higher interest rates. With car loans, and unlike dealer finance, you have to make two stops: One at the lender to secure funds and another at the dealer’s showroom, private seller’s door, or the auction floor to shop around for your car.
Dealer finance and car loans: The upsides and downsides
Dealer finance
Pros
- You get to sit back and relax. The dealer finance rep is there to make sure you’re sorted in terms of paperwork and other arrangements.
- Provides a quicker exit with your new ride. The convenience of making just one stop saves you time and effort.
- Cheaper finance costs. You may get an attractive rate and smaller repayments that leave you with more cash flow.
- There’s room for negotiation. Most dealers are open to haggling since it improves customer experience and drives sales.
Cons
- Only available for new vehicles. A new ride is more expensive and depreciates faster than pre-owned autos.
- Lump sum payment required at the end. The catch to lower rates and instalments is a balloon payment due at the end of the loan term. You have to save up for it, and it may be challenging to cover it in one go.
- High sale prices may offset attractive rates. An eye-grabbing interest rate may seem appealing, but it’s a sales tactic that encourages the purchase of high-priced vehicles.
Car loans
Pros
- Fewer restrictions. You can buy used and new vehicles, including classics and vintages, with little restriction on make and model. You can also buy from a private seller, dealer, or auction.
- Shipping around helps you get a better deal. With so many competitive car loans on the market, you have more control when choosing a suitable bargain deal.
- More flexible offers. Car loans give you more room to tailor your debt to your situation. For instance, you can refinance or switch to a different repayment frequency.
- The vehicle immediately belongs to you when the finance period ends. No balloon payment required – simply make regular payments until the agreed loan term is over.
Cons
- Higher rates. Advertised rates for car loans are less thrilling than for dealer finance
- The legwork is all yours. Arranging the details and paperwork of your car loan without expert help can be a hassle.
- Longer turnaround times. You may have to wait longer to secure the funds you need.
A closer look at balloon payments and 0% finance
A balloon payment is more common with dealer finance than car loans. If you opt for a balloon payment, your regular repayments become smaller and more manageable. But the arrangement only works if you agree to a lump sum payment when the loan term expires. The good news is that you won’t have to pay interest on this outstanding balance.
Whether you choose a balloon payment depends on your budget and your ability to save up for it. If the option sounds enticing, cover your tracks by doing the proper calculations so you know what you’re stepping into.
Otherwise, if you’re unable to square your debt, you may be forced to refinance. This is a more expensive option that dealers are only too interested in offering since it makes them more money. Therefore, it’s best to avoid taking up a refinance offer, particularly since you might end up paying more than the vehicle’s worth.
It’s also best practice to not run headlong into a 0% car finance deal. A non-existent interest rate is most likely a sales ploy that reels borrowers in, and the chances of paying less total costs are slim. That’s because the offer almost always involves hidden costs, large balloon payments, a higher purchase price, or an introductory rate that ends up higher than average when the promotion expires.
Read the terms and conditions carefully and dig into some research to avoid getting the wool pulled over your eyes.
How to compare dealer finance and car loan options
Many Aussies rely on finance sold by dealerships and car loans to get behind the wheel. Here’s what to consider when looking for the best deal that makes purchasing your pride and joy worthwhile:
- Finance costs. Finance costs are generally split into interest and fees. Your interest rate can be fixed or variable, while fees and charges may include application or establishment fees plus ongoing monthly and annual costs. The comparison rate is a shortcut to calculating total costs since it combines the interest rate and regular fees.
- Balloon payments. For dealer finance, check if the balloon payment is a feature you can opt out of. If this feature appeals to you, find out how much the lump sum payment will be and if you can afford it.
- Early repayments. If you find yourself more than able to cover your instalments, making extra repayments allows you to eliminate some borrowing costs. It’s, therefore, important to choose an option that provides this feature at zero or minimal cost.
- Redraw facilities. Once you make extra repayments, a redraw facility keeps them on hand in case you may need some of the cash, for instance, in an emergency.
- Other beneficial features. Depending on your preference, this may include discounts on insurance and other add-ons or a faster loan processing speed.
What else do I need to know about dealer finance?
Remember, the star attraction of dealer finance car loans is the convenience. But don’t let it trap your attention. Consider bank car loans vs dealer finance or compare offers from P2P lenders, credit unions, and other finance companies to get the full picture of what constitutes a good deal.
The entire package must be affordable, from the rate to the fees and charges. Checking for this shouldn’t be a problem since BestFind provides you with the best comparison tools, including calculators and product tables.
Dealer finance and car loans FAQs
What do I need to apply?
To be eligible, you’ll need to be at least 18 years old and a citizen or permanent resident of Australia. You’ll also need a good credit score. Some documents to have on hand include a driver’s licence, payslips, bank statements, and proof of residence.
Is finance available for Aussies with bad credit?
Yes, but vehicle finance packages for bad credit are typically more expensive. Check your budget’s strength to ensure you can afford bad credit dealer finance or car loans.
Will I be able to sell my car if I’m still making repayments?
When the loan is secured, vehicle ownership only shifts to you once your debt is paid in full. If you’re planning to sell your ride, first make arrangements to clear what you owe.
Can I walk into any dealer and apply for finance?
Many Aussie dealerships offer one-stop deals, but you’ll find a handful that don’t. A call or chat with your preferred dealership can help you establish if they also sell finance.
Can I switch from a car loan to dealer finance and vice versa?
Moving from a car loan to dealer finance a while after your agreement is off the cards since dealer finance only caters to new vehicle purchases. Switching from dealer finance to a car loan may spark additional fees and charges.
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