dealer-finance-vs-car-loan

Dealer Finance vs Car Loan

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 financeCar loan
Interest rates
  • Can offer lower interest rates than car loans
  • Low interest rates may only be available for specific makes and models
  • Commission for the car salesman may push rates up
  • 0% rate deals may indicate a higher purchase price for the car
  • Lenders offer various rates, which means you can choose the most competitive
  • Using your car as security lets you take advantage of lower rates
Loan term
  • Typically three- to four-year terms
  • A balloon payment is usually payable at the end of the term
  • Early repayment costs may apply
Benefits
  • The dealer finance rep handles the paperwork
  • No need to shop around for better offers
  • If you repay the balloon payment (instead of refinancing) you can save
  • Gives you leverage to negotiate the sale price
  • A range of competitive car loans are available
  • Your repayments will see your car loan repaid in full at the end of the term
  • You can choose your lender and your loan
  • Loans are available for new, used and classic cars
Drawbacks
  • You need good credit to be eligible
  • It's usually only available to new vehicles
  • Balloon payments can be large and it can be difficult to save that money while repaying a loan
  • Higher interest rates may apply to certain types of loans
  • Upfront and ongoing fees may apply
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.

Discount Car Loan Offer

Beyond Bank Low Rate Car Loan "Special Offer"

from

5.69 % p.a.

fixed rate

from

5.97 % p.a.

comparison rate

  • Low fixed interest rate
  • Offset and redraw feature
  • Borrow from $25,000
Security Logo

100% confidential application

Discount Car Loan Offer

Apply for Beyond Bank Car Loan and enjoy a great low fixed interest rate with no ongoing fees. You'll also get access to a limited time 'Special Offer' rate on your loan.

  • Interest rate from: 5.69% p.a.
  • Comparison rate: 5.97% p.a.
  • Interest rate type: Fixed
  • Application fee: $175
  • Minimum loan amount: $25,000
Go to site
Rates last updated December 18th, 2017
$
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Product Description Monthly Repayment
Beyond Bank Low Rate Car Loan
From 5.69% (fixed)
5.97%
$25,000
1 to 7 years
$0
$175
A great rate for cars under 2 years old.
bcu Car Loan
From 5.9% (variable)
6.82%
$5,000
1 to 5 years
$8
$250
Borrow up to $65,000 for a car up to 5 years old. The New Car Loan from bcu allows you to make extra repayments and access a redraw feature
IMB New Car Loan
From 5.99% (fixed)
6.34%
$2,000
1 to 7 years
$0
$250
Borrow up to $75,000 for a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.
Stratton Finance New Car Loan
From 5.49% (fixed)
6.62%
$18,000
1 to 7 years
$7
$499
Benefit from a car broker with over 25 years experience
RACV New Car Loans
From 6.49% (fixed)
7.03%
$15,000
1 to 7 years
$0
$380
Enjoy this fixed rate new car loan offer from RACV. No ongoing fees.
Bank Australia Car Loan
6.45% (fixed)
6.66%
$1,000
1 to 7 years
$0
$150
A competitive rate and the ability to offset your car’s carbon emissions for the loan term.
Latitude Personal Loan (Secured)
From 12.99% (fixed)
14.2%
$3,000
2 to 7 years
$13
$250 (Loans under $4000 - $140)
Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.
NRMA New Car Loan
From 5.99% (fixed)
6.53%
$15,000
1 to 7 years
$0
$380
Purchase a new car with an NRMA Car Loan with a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.
RACQ New Car Loan
6.17% (fixed)
6.72%
$3,000
7 years
$0
$395
A low fixed rate loan from RACQ suitable for buying a new car. Note: Loan only available to QLD residents.
MoneyForJam Car Loan
From 4.95% (fixed)
5.8%
$5,000
1 to 7 years
$6
$400
Apply for a car loan from $5,000 and get access to a panel of lenders.
AutoCarLoans
From 5.16% (fixed)
6.64%
$15,000
1 to 7 years
$5
$381.80
AutoCarLoans can match you with a lender from its panel with rates starting from 5.16% p.a. Suitable for vehicles up to 2 years old.
IMB Secured Personal Loan
From 7.39% (fixed)
7.74%
$2,000
1 to 5 years
$0
$250
All approved applicants can access this competitive rate and use the loan to finance a range of purposes. Loan amounts up to $60,000 available.
RACV Personal Loan
From 7.49% (fixed)
8.04%
$5,000
1 to 7 years
$0
$380
You could use this personal loan offer from RACV to help finance a renovation, holiday or project.
bcu Secured Freedom Loan
From 9.08% (variable)
9.99%
$4,000
1 to 5 years
$8
$250
A competitive, secured personal loan that you can use for a variety of purposes.
RACQ Used Car Loans
8.95% (fixed)
9.52%
$3,000
5 years
$0
$395
Benefit from a competitive fixed rate and a 21-day satisfaction guarantee when purchasing a used car. Note: Loan only available to QLD residents.
St.George Secured Personal Loan - Fixed Rate
8.49% (fixed)
9.6%
$3,000
1 to 5 years
$12
$195
Get behind the wheel of your perfect car with a competitive interest rate from St.George. Get an application response within 60 seconds.
Bank of Melbourne Secured Car Loan
From 8.49% (fixed)
9.6%
$3,000
1 to 5 years
$12
$195
A low rate personal loan from Bank of Melbourne with variable or fixed option.
Freedom Finance Car Loan
From 5.1% (fixed)
5.94%
$35,000
1 to 5 years
$0
$380
If you meet all the requirements you could get access to a range of lenders to finance a new or used car up to 4 years.
NRMA Used Car Loan
From 6.99% (fixed)
7.54%
$15,000
1 to 7 years
$0
$380
Finance a used car with NRMA and benefit from a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.
Latitude Car Loan
From 6.99% (fixed)
8.1%
$5,000
1 to 7 years
$10
$295
A secured loan with a competitive rate that can help you finance new or used vehicles.

Compare up to 4 providers

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

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Related Posts

IMB New Car Loan

Borrow up to $75,000 for a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.

Beyond Bank Low Rate Car Loan "Special Offer"

A great rate for cars under 2 years old.

RACV New Car Loans

Enjoy this fixed rate new car loan offer from RACV. No ongoing fees.

Latitude Personal Loan (Secured)

Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.

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4 Responses

  1. Default Gravatar
    RanaJuly 10, 2016

    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” ?

    • Staff
      ElizabethJuly 11, 2016Staff

      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

  2. Default Gravatar
    RussellAugust 20, 2015

    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

    • Staff
      ElizabethAugust 21, 2015Staff

      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

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