Save money by knowing your options before jumping into a dealer financed or new car loan.
Australians have many options when it comes to financing a new car. Two of the most well-known methods are dealer loans and new car loans. It's important to know the difference between these two financing options in order to select the best one for you. Jump ahead to the price comparisons >>
Dealership finance and car loans
Dealership finance refers to the finance options offered by a car dealership. Examples include Toyota Finance, Nissan Finance and Esanda usually come with extremely low interest rates or no interest at all. Because of the low interest dealer finance offers lower repayments, but you will be required to pay a balloon payment at the end of loan term which is usually a couple of thousand dollars.
Some features of dealer finance are:
- Can offer lower interest rates than car loans
- Low interest rates may only be available for specific makes and models
With a car loan you receive a lump sum payment to purchase your vehicle. Your vehicle will be secured to the loan so you can get more competitive rates than unsecured loans, usually between 6-10% p.a. However, if you default on your loan you can lose your vehicle. Car loan terms are usually for between one and seven years and rates can be fixed or variable.
| Dealer finance | Car loan | |
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| Interest rates |
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| Loan term |
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| Benefits |
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| Drawbacks |
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| Suitability | Borrowers that want to buy a new car and have a deposit saved. | Borrowers that want to shop around and have the option of buying from a dealer or a private seller. |
What to know about balloon payments
One of the main downsides of dealership finance is the balloon payment. To keep your repayments low, thousands of dollars is taken off the purchase price of the car. This is referred to as the "balloon payment". You will not be charged interest on this amount and you will be required to pay the balloon payment at the end of the loan term.
If you can't afford to pay this amount you can choose to refinance it – this is how many dealership finance companies make their money. If you do decide to opt for dealership 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 save it. This way, you will have your finance paid off and won't have to enter into another refinancing contract.
Dealer financing & car loan side by side
How much can they save?
Two neighbours, Julian and Clay, 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 Clay takes on financing option from the dealership where he made his purchase.
The two cars they purchased ended up being the same price — $20,000 — so who chose the better financing option?
Julian takes out a car loan at a 7.00% p.a. rate for a five-year period. Using a car loan calculator he sees that he will pay $396 in monthly repayments, and will pay a total of $3,761 in interest over the course of the loan term.
Clay, who takes on dealer finance, sees that he’ll be paying $283 over the term of his loan. He’ll be borrowing the same amount of money, but his residual balloon payment of $5,000 means he’ll only be charged interest on $15,000, resulting in lower ongoing repayments.
The results
Julian continues to pay $396 every month and at the end of the five years pays his car out in full. His repayments total $23,761 for his original $20,000 vehicle purchase. Clay makes lower ongoing repayments of $283, but when it comes to the end of his five-year loan term he’s responsible for paying $5,000.
This means he will need to ensure he has this amount saved by the end of his loan term, requiring him to put away $83.33 a month to have the amount saved. All up, with the amount he’d need to save per month and his repayments, he’d be contributing $366 per month to his loan (directly or indirectly). Compared to his neighbour Clay, he’d be saving $1,800 over the loan term.
What else they need to consider
While one financing option saves you more in ongoing repayments, it’s not only the interest and savings that should be considered when weighing up your options. Clay and Julian should also look at the features offered to them by their lenders. For instance, are they able to pay out the loan early or make extra repayments? Do they have access to features such as a redraw facility? Do they have special benefits like discounted insurance? Clay and Julian both need to look at their financing options as an entire package before signing on the dotted line.
Compare Car Loan Interest Rates
You can use the below table to compare a range of car loans from different lenders. Click on the table headings (interest rate, loan amount, loan term etc.) to sort the table by the features you want and find the loan that will most benefit you. You can click on the name of the loan to read more about it, or click the "Go to Site" button to apply directly through the lender.
IMB New Car Loan Offer
IMB New Car Loan
fixed rate
comparison rate
- No monthly fees
- No early repayment fees
- Borrow up to $75,000
100% confidential application
IMB New Car Loan Offer
Apply for IMB New Car Loan and enjoy a great low fixed interest rate with no ongoing fees.
- Interest rate: 5.99% p.a.
- Comparison rate: 6.34% p.a.
- Interest rate type: Fixed
- Application fee: $250
- Minimum loan amount: $2,000
- Maximum loan amount: $75,000
Convenience always comes with a price, and that extends to the dealer-financed car loan. Before settling for what they are offering you should compare what outside banks and non-bank lenders are offering. In many cases, the terms offered here will far outweigh the low interest rates the dealer is offering.
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 calculators. If you do your homework first, you can end up not only with a new car in your driveway, but a financing deal that works well within your budget.
Picture: Shutterstock
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