Written by , updated on June 30th, 2023
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What’s better – applying for a car loan with a dealer or an independent lender?
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Some people apply for car finance through a dealer because it is more convenient to complete the purchase in the dealership but should you get a car loan from a dealer?
Some car dealers offer finance through their own preferred lenders or manufacturer-owned accredited lending institutions (such as Toyota Finance, MyFord Finance, or Nissan Financial, for example.) This means a car buyer can purchase the vehicle and arrange finance within the same transaction, instead of looking to a third party such as a bank, independent lender, or car loan broker.
Some types of dealer finance may come with restrictions or conditions. Some lender finance deals may require buyers to purchase a vehicle at the list price; be locked into buying scheduled servicing from a dealer network; you may have to accept a balloon payment as part of your finance package; you may only finance new vehicles or selected models; or financial product offers may be limited to people with excellent credit scores.
According to the Australian Consumer and Competition Commission (ACCC) report, as part of the Royal Commission into the banking and finance sector, “dealers will be willing to sell some goods and services with a lower mark-up (including new cars) if this means they can sell more high mark-up services (such as parts, insurance and finance).”
Applying for car finance can give car buyers greater flexibility, more choice, and in some cases, a leg up in negotiation if they choose to get car loan pre-approval.
If a car buyer applies for finance through a car loan broker, the broker can look through dozens of different car loans to see which one is the most competitive and suitable for the buyer. It also gives people with average or below average credit an opportunity to gain approval for car finance.
Before applying for any kind of finance, you should check your credit score and credit history to see what types of loans you could be eligible for.
Some types of dealer finance may include jargon and conditions such as “balloon payments” which requires you to pay lump sum at the end of the loan. Know what types of conditions are involved before considering any type of finance
To make clear and direct comparison of any two loans, look for the comparison rate, which is an interest rate plus most fees and charges included. This can give you a clearer picture of how much a loan will cost over the term.
If a dealer is pressuring you to take a dealer finance offer, be prepared to walk away. Though dealers will insist their dealer finance is more convenient, make sure you've done your homework and determined their finance deal suits you best.
If you're unsure about car loans or dealer finance, consult a car loan broker. They can answer questions and guide you through the car loan application process.
Here is a working example of two car loans: one with a car loan broker like Savvy and with dealer finance. The dealer is offering a car for $30,000. The dealer offers you a base interest rate of 4%p.a. and a balloon payment of 30% over five years. Your broker has found a loan with a comparison rate of 4.5% over the same period.
| Car Loan | Dealer Finance | |
|---|---|---|
|
Base Rate |
N/A |
4% |
|
Comparison rate |
4.5% |
7% |
|
Repayment |
$559 |
$468 |
|
Balloon Payment |
$0 |
$9,000 |
|
Interest Paid |
$4,157 |
$6,242 |
With all the fees and charges added, the dealer’s comparison rate works out to about 7%p.a. This gives you a monthly repayment of about $468 per month. Your broker’s loan repayments work out to be $559. Despite the difference in repayments, you will have paid $6,242 in interest to the dealer, while only paying $4,157 in interest to your broker’s lender.
Note also at the end of the car dealer’s loan, you will need to come up with 30% of the purchase price: $9,000.
Here is another scenario. You’ve been able to negotiate a better price with the dealer; a discount of about $5,000. Using the same loan term, comparison rate, and now lower amount ($25,000) your repayments drop to $466 per month. You also walk away at the end of the loan, as there is no balloon payment.
Let’s also say you get a bonus from work and want to pay off your car loan from early. This lender does not charge an early exit fee for finishing the loan early. Your car dealer finance contract may charge large exit fees or breach of contract fees, which may cost you more than if you paid off the loan over time.
Zero percent finance or 0%p.a. dealer finance is offered by dealers because they can control how they generate revenue through restrictions and conditions. A lender or broker can only gain revenue from interest and associated account keeping fees. Remember: a dealer is already making money from any dealer finance deal as they have sold you the goods you wish to finance in the first place.
Zero percent finance arrangements are designed to maximise dealer profits. Such deals may force you to purchase the vehicle at the list price which means you cannot negotiate a better deal with your dealer. These are also offered at a base interest rate, not a comparison rate.
The loan terms may be longer or shorter than consumer car loans (they are usually over three to four years in most cases); they may include balloon payments; they usually attract high fees and charges to recoup the revenue a dealer finance company would normally get through interest. They may also need an upfront deposit and a good or excellent credit score for you to be eligible.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
