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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.
While both are valid options, purchasing a car via finance from the dealership or a more traditional bank loan each has its advantages and potentially costly downsides, so, let’s talk about it.
The Car Loan Differences in Short
Buying a car with the help of an external car loan is an agreement between you and the financial lender.The arrangement requires you to submit documentation and information on the vehicle make and model you’re looking to buy. If approved, the funds are deposited into your account for the purchase of that vehicle.
Purchasing a car via dealer finance means the salesperson acts as a third party between you an a lender, making contact with their bank or financial lenders to get you financed, fast.
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 historys, 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 preapproved the moment you walk on to the dealership floor."
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.
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.
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