Car loans and dealer finance are both popular car financing options that can get you the funds you need.
Learn how they differ and which one may be right for you below.
How does financing a car work?
In simple terms, 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.
Dealership finance and car loans
Dealership 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. Dealer finance may offer lower rates than car loans, but these rates may only be available on specific makes and models. New regulations introduced in 2018 mean that the dealer can no longer increase the interest rate secured with the lender when offering finance to a buyer.
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. You can use your vehicle as security against the loan, so you can get more competitive rates than unsecured loans, often 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.
May 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
Typically three- to four-year terms
A balloon payment is usually payable at the end of the term
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
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
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 does a balloon payment mean?
As mentioned above, one of the key differences between car loans and dealer finance is the ability to use a balloon payment. Depending on your financial situation and preferences, opting for a balloon payment may be helpful in managing how you repay your loan. Adding a balloon payment will reduce the size of your regular repayments, but require you to make a larger lump-sum payment at the end of the loan term. You will not be charged interest on this amount, but will need to factor it into your budget when considering which financing option to use.
If you can't afford to pay this amount, you may also 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 have repayments of $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.
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 you should consider 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.
Convenience always comes with a price, and that extends to dealer-financed car loans. 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. 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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Not necessarily. While a lot of dealerships will offer some form of dealer finance, this will not be the case for all of them. You should always talk to the dealer directly if you're interested in financing your car through them.
Am I eligible for a car loan or dealer finance?
You will need to be at least 18 years old and an Australian citizen or permanent resident to be eligible for a car loan. If you do not meet these criteria, you may still be able to apply for dealer finance, but this will depend on the individual dealer.
Can I move from one option to the other?
While it may make sense to switch from a car loan to dealer finance partway through the agreement, this will generally not be possible.
Dealer finance is generally only available on new cars, meaning it will not be available to those who have already taken out a car loan on the vehicle. Furthermore, if you wish to pay off your car loan early, you may face additional fees or charges or may not be able to do so at all. Breaking your dealer finance agreement early may also bring additional fees.
If you encounter financial difficulties or fail to meet your repayments on either a car loan or dealer finance, your car may be repossessed and you may be liable for any outstanding amounts.
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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