Why getting a car loan from a dealer can hurt you financially?

Last updated on July 28th, 2021 at 05:01 pm by Bill Tsouvalas

With so many ways to finance your car which one should you choose? If you are looking into dealership finance, you will soon find the pros and cons of having your car financed through a dealership car loan. At the end of the day, we all want something that is manageable and affordable. However, before you go in to finance your car with dealership finance these are a few things that you need to consider.

car dealer finance

Low interest rates that are tailored for certain models

The selling point of dealership finance is that it comes with low or no interest rates. But this is where you need to be careful. Just because it has a low interest rate does not mean it comes with the best offer. Furthermore, the low interest rate can be restricted to certain makes and models.

Balloon payments

You could be required to pay a balloon payment at the end of a loan term which can cost a couple of a thousand dollars. Balloon payments on a car loan from a car dealership are usually added in order to keep your repayments low. This amount will vary based on how much you have taken out and the agreement between you and your dealer.


Mark borrows $40,000 over a five-year period term and elects to have a $10,000 balloon payment on their loan. His monthly repayments will be lower than someone who has taken out a car loan from another financer. However, when the term of the loan comes to an end he will still owe the financer $10,000.

It will be best if you open a savings account to save up for your balloon payment to avoid entering a refinancing deal with your dealer.

Early repayment costs

One of the additional fees that you will have to factor into your budget is the early repayment costs. Not all dealerships will penalise you for paying off your car loan early. However, this is one of the fees that you should discuss with your dealer to be clear on whether the loan you are taking out has an early repayment penalty fee or not.

The sticker price can increase

Buying a car at a dealer means that you could be offered something called a value added extra. These might sound good and convenient at first but can slowly increase the price of the car. This means that items such as extended warranty, added mats, fabric protection to name a few could end up driving up the cost of your car loan. In some cases, you probably could get these ‘value added extras elsewhere or on closer inspection, you might not need them at all.

You need to have good credit

Before going to the dealership, it could be advisable to consult your credit score to see if you are in good standing. A good credit score will be able to inform the dealer as to whether you can afford the car financing you are taking out with them or whether the chances of you defaulting on are higher. A good credit score is usually between 622 – 1200. Even if you are not taking out a loan with a dealer, it is important that you check your credit report beforehand to see if everything is in order.

To find out whether you are getting the best deal on vehicle finance, it is important that you weigh your options by looking at other car financing options. Your winning card is to compare, and that way you will know if you are getting the best value for money. Online calculators can also be of great use when finding out how much you could be looking at in repayments in order to assist you budget better.

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