Car Loans vs Dealer Finance

What’s better – applying for a car loan with a dealer or an independent lender?

No obligation. It won't affect your credit score.
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, updated on June 30th, 2023       

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Should you get a car loan through a dealer?

Why do some car buyers apply for car finance through a dealer?​

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).”

Why do most people apply for finance through a lender or broker?

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.

How to get the most out of your car finance?

More facts and breakdowns about car loans vs dealer finance

A tale of two car loans - dealer finance vs car loan brokers?

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
Comparison rate
Balloon Payment
Interest Paid

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.

What is zero percent finance? Why is is only offered by dealers?

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.

Answering your questions about car loans vs dealer finance

What is dealer finance?

Dealer finance refers to finance provided by a car dealer either as an authorised credit provider, using a preferred provider, or special arrangement with a bank. The dealer itself provides the means for financing a new car through one of these three methods.

What is a credit score?

A credit score, according to ASIC, is a number based on an analysis of your credit file, at a point in time, that helps a lender determine your creditworthiness. This is a number between 0-1000 that lenders use to figure out if you are a risky borrower or not. The higher the score the lower the risk, and vice versa.

What is zero percent finance?

Zero percent finance is a marketing tactic many dealers use to entice people to buy their cars and use dealer finance. Fees, charges, and conditions such as restricting negotiation make up for the “zero” percent interest rate.

I have bad credit. Can I apply for dealer finance?

In most cases, no. Dealer finance is often limited to people with good or excellent credit to buy new vehicles. People with bad or impaired credit should consult a car loan broker or specialist lender instead.

What is a balloon payment?

A balloon payment or residual value payment is a portion of the loan balance set aside for immediate payment at the end of the loan term. This can vary between 20-50% of the total. The benefit is lowered regular repayments. The downside is that a borrower will have to come up with a lump sum within a short time, or refinance the amount and incur more interest.

What is a comparison rate? How can I calculate repayments using one?

A comparison rate is an interest rate that includes most ongoing fees and charges. This helps borrowers compare like-for-like loans and get a complete picture of repayments. Using a car loan calculator, their estimate will be more accurate than figuring out interest rates and fees separately.

What is car loan pre-approval and how does it help in negotiation?

A comparison rate is an interest rate that includes most ongoing fees and charges. This helps borrowers compare like-for-like loans and get a complete picture of repayments. Using a car loan calculator, their estimate will be more accurate than figuring out interest rates and fees separately.

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