Car loans and dealer finance are both popular car financing options that can get you the funds you need, but there are some key differences and considerations to know of.
Let's take a look at them below.
Financing refers to the funds you secure in order to buy a vehicle. You have a number of car finance options, such as using your existing savings, applying for a car loan or applying for dealer finance through a car dealership. Once you have secured finance, you will use the money to cover the purchase price of your new car. If you're getting a car on finance, you'll then need to repay the amount you borrowed according to the terms you agreed to with the lender.
Dealer finance refers to the finance options offered by a car dealership, such as Toyota Finance, Nissan Finance or Esanda, which secures the funds through a lender.
If you choose to get dealer finance, your car payment plan will be similar to a normal car loan and require you to make regular repayments over a set period to cover the cost of the vehicle. Unlike most car loans, many dealer finance options give you the ability to lower your regular repayments by making a lump-sum balloon payment at the end of the loan term.
With a car loan, you receive a lump-sum payment to purchase your vehicle and then you pay back the money plus interest over a set period.
You can use your vehicle as security against the loan, so you can get more competitive rates than on an unsecured loan, which is priced higher because the lender has no security to fall back on. However, if you default on your loan, you can lose your vehicle. Car loan terms are usually for between 1 and 7 years and rates can be fixed or variable.
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A balloon payment is a lump sum payment at the end of your finance period to finish paying off the car. It's typically associated with dealer finance. Depending on your financial situation and preferences, opting for a balloon payment may help manage how you repay your loan.
For example, let's say you want to purchase a $40,000 car. With the option of a balloon payment you might agree to pay $5,000 at the end of your loan, meaning you make monthly repayments towards the remaining $35,000.
If at the end of your finance period you can't afford to pay the balloon payment, you may also choose to refinance your car loan. This is how many dealership finance companies make their money.
If you do decide to opt for dealer finance, calculate how much you will need to put away each month to have your balloon payment saved at the end of the loan term and then make sure you have it. This way, you will have your finance paid off and won't have to enter into another refinancing contract.
How much can they save?
Neighbours, Julian and Susan, are both in need of a new car. After researching their options and choosing what kind of car they want to get, Julian opts for a car loan while Susan takes on financing from the dealership where she made her purchase.
The cars they purchased ended up being the same price – $50,000 – so who chose the better financing option?
Julian takes out a car loan at an 8.00% p.a. rate for 7 years. Using a car loan repayment calculator, he sees that he will pay $779 in monthly repayments and will pay a total of $15,462 in interest over the course of the loan term.
Susan, who takes on dealer finance with the same term and rate - dealer terms are usually shorter, but we've matched Julian's 7 years for a like-for-like comparison - sees that she'll have monthly repayments of $735. She'll be borrowing the same amount of money, but $5,000 of it is held back as a residual balloon payment instead of being paid down along the way. That $5,000 stays part of the loan and keeps accruing interest for the full 7 years, which is why her repayments are lower but her interest bill is higher.
The results
Julian continues to pay $779 every month and finishes repaying his loan after 7 years. His repayments total $65,462 for his original $50,000 vehicle purchase.
Susan makes her lower ongoing repayments of $735, but when it comes to the end of her 7-year loan term, she's responsible for paying the $5,000 balloon.
She would save that $5,000 by putting away $59.52 each month, meaning in theory she contributes (directly or indirectly) about $794 a month towards the car.
This totals $66,716 over the life of the loan, which is $1,254 more than Julian pays. The balloon lowers Susan's monthly repayment by about $45, but she pays more overall because interest keeps building on the $5,000 she hasn't paid down.
* This is a fictional, but realistic, example.
The decision between car loans or dealer finance really comes down to your own personal financial situation and what's on offer to you at the time.
Some things to consider when comparing include:
Although it might seem convenient to take out dealer finance when you are there at the dealership, convenience can come with a price. Before settling with what you're being offered, compare outside banks and non-bank lenders to see what terms and rates are being offered elsewhere.
Always compare the rates and terms offered by a variety of different lenders before committing to anyone. There are numerous tools available to help you with this, such as comparison charts and car loan repayment calculators.
As with any loan product, if you want to buy a car on finance, you should make sure that it is within your budget and that you will be able to meet your repayments.
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Hi , can you tell me options to get out of dealer finance once signed. I have put in $10 k for a deposit on new car and found s new one $23990 drive away. I sighed the contract and the finance after asking whether I could pay it off early without penalty as when I sell my current car I’d like to put it back on the loan and pay the rest off within 12-18mths. Looking at the contract three days ago I have noticed it is a secured fixed loan and has an exit admin fee, a $15 penalty per month fee for the rest of the 5 years , and a break fee determined by the finance company to recoup their interest losses for me paying it out early !!! The dealer finance guy definitely did not explain those fees !!!! So now the car has arrived at the dealers it’s been paid for but I have not made a finance payment yet to the bank. When I rang them they told me I could perhaps “flat cancel” ?
Hi Rana,
There are cooling off periods for vehicle finance deals but they vary in each state and the maximum is only three days, so this may have lapsed for you. If the financier did not tell you about the extra charges you can complain to them and tell them you were not aware of the charges in the contract. You can also seek independent advice from the credit and investments ombudsmen to see what kind of options you have available to you.
I hope this helps,
Elizabeth
should I have to take out no gap insurance and consumer credit insurance for a dealer loan on a new car, also is it right they charge a dealer agency fee and a loan set up fee, finally 7.49 fixed doesn’t seem competitive and why should i agree to pay commission on consumer credit insurance
Hi Russell,
Thanks for your question.
For insurance, these are generally optional extras and its up to you whether you want to take them on. It’s best to review what the insurance offers and when you will and won’t be covered, what limitations there are, etc. before agreeing to take it out. Dealer agency fees and commissions are quite common with dealer financing as this is how the finance company makes money – you can ask exactly how much commission they are making and how it is calculated on your finance amount to see how much it adds to your loan. For the amount being competitive, you might want to compare it with other offers out there to see if you are getting a good deal.
I hope this information has been of use.
Thanks,
Elizabeth