.jpg "Photo by Swansway Motor Group on Unsplash")
After countless hours searching the market and finding your perfect vehicle, it's easy to get caught up with romantic ideas of your new pride and joy. Now, though, comes the time to pay for your new wheels, with some options proving far more favourable to buyers than others.
Whether it's the convenience of in-house finance from the dealership or a loan from your bank or credit union, buyers have a range of options when it comes to paying for their new car.
Both dealership financing and traditional bank loans are valid options for buying a car, but each comes with its own set of advantages-and potentially costly drawbacks. So, let's dive in and explore what you need to know.
What is a car loan?
A car loan is a type of personal loan used specifically to purchase a vehicle. When you take out an external car loan, you enter into an agreement directly with a financial lender. The arrangement requires you to submit documentation and information about the vehicle's make and model. If approved, the funds are deposited into your account for the purchase of that vehicle.
Car loans can be secured (where the car acts as collateral) or unsecured (with no asset tied to the loan), and can offer fixed or variable interest rates. Loan terms generally range from 1 to 7 years.
This type of financing gives you the flexibility to shop for a vehicle independently while keeping full control over your loan terms and lender choice.
An example of a range of car loans is seen in the comparison table below.
What is car dealership financing?
Dealer financing involves the car salesperson acting as an intermediary between you and their preferred lenders. They coordinate with banks or finance companies on your behalf to secure quick and convenient financing right at the dealership.
Instead of applying for a loan independently, the dealership submits your application and handles most of the paperwork. This makes the process fast and convenient, sometimes allowing you to be approved and drive away the same day.
Dealership financing can be especially appealing if you're looking for a one-stop-shop experience, or if you have a limited credit history. Some dealers even offer promotional rates through the manufacturer, though these may come with specific conditions or restrictions.
See Also: Car Loan Repayment Calculator
The Advantages of a Car Loan
One of the primary advantages of buying a car via a more traditional car loan is the number of options you'll have at your fingertips. With a car loan, you're able to scour the market for the best possible finance deals and while this process demands more time and effort, it can result in a more favourable package overall.
You also have time on your side, which often lends itself to more informed and rational financial decisions, allowing you to comb through the payment terms and conditions.
More Competitive Rates
With a wider range of finance options at your disposal, you're likely to find a car loan with more competitive rates yourself or with the help of a broker than what's available at the dealership. Cutting out the middle man - in this case, the dealership - can prove a cost-effective finance option.
You're in the Driver's Seat
Contacting lenders directly allows you to have more control over the buying process than when you're sitting inside the dealership. You'll be able to choose between fixed or variable interest, the car loan term length (usually 1 to 7 years), and other key features.
You may be able to negotiate your preferred payment structure or help leverage existing home or personal loans with your current lender for a competitive interest rate.
Added Flexibility and Payment Options
If you're purchasing a car via a traditional car loan through a bank or lender, you may have more options when it comes to paying partial or full amounts of the car loan early.
A Known Brand and Responsible Lending
By selecting a bank or non-bank lender as your car loan financier, you're choosing a regulated brand under APRA or ASIC rules. They must abide by the National Consumer Credit Protection Act of 2009, and be amenable to hardship applications and lend money to you responsibly.
You're also dealing with a brand you've probably heard before, which provides peace of mind. With dealership financing, the lender behind the product might be more obscure.
Shop with Peace of Mind at the Dealership
If you can step onto the dealership floor and declare you have pre-qualified for a car loan, they know you're not messing around. You'll be able to shop with a hard budget in mind, and not be tempted by dealership tricks. It's a great way to show you're not a tyre kicker and you're ready to close on a deal - so long as the price is right.
The Disadvantages of a Car Loan
The major downside of a traditional car loan is the time and effort involved in comparing different products from lenders and banks. Considering just how much money you can save, though, spending the time is a worthwhile investment to find a car loan at the most competitive rate.
You can of course go through a car loan broker, but this can still require mental admin, and they likely don't work with every lender, so you may not know if you're getting the best deal.
The Advantages of a Dealership Loan
There's one undeniably attractive aspect of dealership car finance - the convenience. You could be walking the floor and suddenly find yourself with a salesperson hell-bent on finding you a finance option so you can drive away in that car as soon as possible. Maybe even that day. They do your homework for you, and for some buyers, that's a convenience worth paying for.
Buy Without Breaking a Sweat
Purchasing a car via dealership finance is likely to be one of the smoothest transactions you'll make, simply because they're doing the work for you. In order to get the deal secured and their commission in the back pocket, dealership finance is often a pretty seamless process.
Dealership Loans Can Work With Lower Credit Ratings
Some dealerships offer special finance deals to customers with a sub-optimal credit score which is useful if you don't have a long or positive history, or you're in the process of rebuilding your credit score.
The sharpest deals at the banks are often reserved for those with great credit histories, and they are often pretty restrictive with whom they lend money.
Manufacturer Finance Can Be Competitive
You've probably seen, when you go to buy a new car from the manufacturer - e.g. Toyota - that the manufacturer offers competitive finance options. These can offer a low rate, however you might be restricted as to how you structure the loan.
It can also be tempted to take advantage of other manufacturer features such as 'guaranteed future value' - a guaranteed value when you trade back in the car. This can be convenient, but there might be restrictions with how you use the car, or provide complications if you damage it.
Dealer Financing Disadvantages
All the convenience of in-house dealership financing comes with some significant downsides that can, in the worst of cases, leave you with a more costly and inferior loan product.
Julian Finch, of Finch Financial Services, has warned budding motorists about the pitfalls of dealership finance.
"Car dealerships are renowned for engaging in smoke and mirror tactics to get your money, especially when it comes to vehicle finance," he said.
"If a car dealership says they can offer you a great rate on finance, then that means you should run a mile.
"The only way to buy a car with finance is to have the personal loan pre-approved the moment you walk on to the dealership floor."
Peter Willis, director of buying at online vehicle marketplace Carma, issued a word of warning when dealing with dealers, particularly when it comes to finance.
"People have got to be careful about what they do; the pressure tactics can be everything from 'There's someone actually on the way to buy this car if you don't make a decision right now' to promising low repayments," he told the Savings Tip Jar Podcast.
"Beware of those hidden costs… you need to just understand and know that product.
Limited Finance options
Depending on the dealership, your loan options are limited to either a small handful of lenders or in some cases, a single lender. It's a simple numbers game that means you're likely to end up with a less competitive loan than if you'd done the homework yourself.
"Car loans can include various fees, such as origination fees, documentation fees or processing fees, which increase the total cost. These may not be obvious upfront, but soon add up over the course of the loan," Mr Finch said.
"Even though a dealership finance loan [might] offer a lower interest rate than elsewhere in the market, by the time all the fees and charges have been added on, you end up paying considerably more. Interest rates are not always comparable."
Limited Control
Suppose you're at the dealership and you're ready to buy via dealer finance. In that case, you're essentially taking your hands off the steering wheel and placing quite a lot of trust in a salesperson who is incentivised to get the deal across the line, rather than act in your best, financial interests.
You also might not be able to choose your loan length, and you might not even be fully aware of your interest rate. A dealership might advertise in terms of repayments, which can look very low. But when you scratch beneath the surface, you'll discover a high interest rate stretched across a lengthy term, which means a lot more interest payable.
"Car loans often come with longer repayment terms such as five or seven years, which reduces monthly payments but increases the total interest paid over the life of the loan," Mr Finch said.
Time, Pressure and Rushed Decision Making
If you love the vehicle, it's easy to be compelled into a suboptimal purchase at any point in the transaction. This effect is compounded when you're sitting at the dealership, especially if you're pressured into signing the dotted line without enough thought into the loan package and terms.
Beware Dealer Double-Dipping
Some dealers have been known to mark up the cost of your monthly repayments to secure a little extra profit in their back pocket. You may not know who the ultimate institution is at the other end of your loan. A dealership also takes a clip of the interest rate and other fees charged. Considering they've already made a fair chunk simply selling the car, it's not quite fair.
"When you finance through a dealership, they might add a markup to the interest rate offered by the lender, making the overall loan more expensive," Mr Finch said.
Comparing Bank Loan vs. Dealer Finance
|
Feature |
Dealership Financing |
Traditional Bank Loan |
|---|---|---|
|
Approval Speed |
Fast, often same-day approval |
Typically slower, requires more time for approval |
|
Convenience |
Very convenient; dealer handles loan process |
Requires more effort as buyer shops and applies directly |
|
Lender Options |
Limited to dealer's preferred lenders |
Access to numerous lenders and diverse loan options |
|
Interest Rates |
May be higher due to dealer markups |
Generally more competitive and transparent rates |
|
Loan Terms |
Less flexible; terms often pre-set by dealer |
More flexible; can negotiate term length and conditions |
|
Credit Requirements |
Often available to buyers with lower credit scores |
Typically stricter credit criteria to access best loans |
|
Fees and Hidden Costs |
Possible extra fees (origination, processing, dealer markup) |
Usually fewer hidden fees, more transparent costs |
|
Control Over Loan Details |
Limited control; dealer negotiates terms on your behalf |
Full control over loan features and payment options |
|
Regulation and Oversight |
May involve less-known lenders; less transparent; may not be legally obliged to display interest rate |
Regulated by financial authorities providing consumer protections |
|
Impact on Negotiation |
May pressure quick decisions; less room to negotiate price |
Allows buyer to shop with pre-approved financing and negotiate confidently |
Final Word - Dealer vs Bank Finance for a Car Purchase
Everyone's financial position and approach to the car-buying process is unique, which is why there isn't a categorically correct answer, the evidence does sway heavily in the direction of purchasing a car via a more traditional bank loan.
While it requires more time on your part, a self-sourced bank loan will often fruit lower interest rates and a more rational decision-making process overall.
It comes down to numbers. Dealerships are often limited to one, or a select few lenders that they deal with. Compare that with a near-endless list of finance options when you're doing the homework and it's a near certainty you'll find a better deal yourself.
For some buyers, though, time is a commodity that they'd prefer spending elsewhere, with the sheer convenience of dealer financing, and potential accommodation to lower credit scores of dealership financing proving too valuable to ignore.
When unsure, ask yourself these questions when comparing car loan products:
-
What is the total cost of the loan, including all fees?
-
Can I make extra repayments or pay it off early without penalties?
-
How does the monthly repayment fit into my budget?
-
Is the loan secured against the car, and what happens if I default?
-
Do I have multiple lender options, or just one offer?
-
Can I get pre-approved before visiting the dealership?
-
How transparent and flexible are the loan terms?
And if you're unsure when on the showroom floor, don't be afraid to cut the conversation short and walk away.
