Is it better to get a car loan through a dealership or a bank?

It’s always exciting when you’re planning to buy a new car. There’s the hours you spend scouting all the websites, forecourts and the for sale ads; then there’s the fantasising and wondering how you’ll park your new vehicle on your driveway because it’s so huge…

But how to pay for the new wheels? Is a loan from the bank better or cheaper than a loan from the car dealer? Or is finance from the business you are buying the vehicle from a better deal than a traditional loan from the bank or credit union? Both of these options are valid, but each one has its upsides and its downsides. Here’s what you need to know.

The differences in short

A car loan is when you apply directly to your bank or a loan company by yourself. You have to do all of the paperwork and sort out all the details and then the money comes to you for you to buy the car from the dealer.

If you use the dealership car finance option then your car dealer makes contact with their bank or lender and pretty much makes all the arrangements for you. It’s nice and easy…

The advantages of a car loan

With car loans, you’re the person doing all the talking and the planning. You can spend as much time as you need on a comparison website so that you know what you’re getting and can eliminate any options that aren’t quite right for you. It might feel like a chore, but it often pays off in the end.

You’re more in control

Basically, you have more control and power. If you’re dealing directly with the lender then you may be able to negotiate a better payment structure. You could also negotiate a better interest rate if you’re applying to a bank or lender that you already have other financial products with.

You have more flexibility

If you go through a bank you often have more leeway if you want to repay some or all of the loan early. You might also find a bit more forgiveness if you’re late with a payment or there’s a problem because the institution already knows you.

You’ll probably get a better interest rate with a bank

Dealerships often add a few points on top of the bank rate to cover the risk they’re taking with you or to maximise their profit. If you cut out this middleman, you’ll have more chance of getting the best deal available to you.

You have more leverage with the dealership

If you know you’re pre-qualified for a certain amount then you can use this to your advantage when you go to the dealer. If he or she knows you’ve got the vehicle in the bag, they’re more likely to offer a better price to close the deal faster. You’ve done all the work and you’re a more certain prospect, after all.

The disadvantages of a car loan

There are very few downsides to going through a bank or lender directly. You get better rates, a more personal service and you have more control. The only real headache is sorting it all out yourself; you might even prefer that, in which case, it’s a no-brainer.

The advantages of a dealership loan

Sometimes people can just fall into dealership car finance. They’re looking at a car they really fancy and wondering how they can pay for it, when the dealer comes over and gives them a convenient and almost effortless roadmap. A car dealer car loan is the no-sweat option in many ways, which is why lots of people choose them; they also have other attractive aspects.

You hardly have to lift a finger

You tell the dealer how much you can comfortably afford to pay as a deposit and then each month, then the dealer sorts out all the details for you.

Your dealer will do all the sweet-talking

The dealership wants this sale to happen, so your dealer will try everything within reason to get you the loan at a good rate for you.

Dealership loans are good if your credit history isn’t great

Some dealerships can offer special finance deals to customers with less-than-stellar credit ratings. This can be handy if you’re just starting out or if you'e rebuilding your score.

There are some downsides, though

There are always disadvantages to getting any sort of finance, in reality. You need to decide if they’re worth putting up with to get your new wheels. Here are some:

You have very little control

You have hardly any say in the negotiation so you have to trust your dealer. Going through a dealership that friends and family recommend helps; otherwise, you just have to hold on and hope that your dealer finds the best possible deal.

You might feel compelled to accept a deal

There’s also the risk that if they come back with a slightly suboptimal deal, you feel obliged to accept it because of the effort they’ve made on your behalf.

You may end up paying over the odds

The dealer may mark up the cost of your monthly repayment a bit to make an extra profit for themselves. They’re already making a profit by selling the car, so it’s not quite fair.

Making your mind up

It does look like going through a bank or lender and doing it all yourself is the better option for most people. You get lower interest rates and you have more of your own agency to negotiate and, if necessary, walk away with no guilt.

Of course, you have to do everything yourself, but if you’re a good negotiator you might enjoy the process. On the other hand, if you’re a bit shy or you have a patchy credit history, then car dealer finance may be the way to go.

Compare car loans from Australia’s major banks, credit unions and other lenders here.

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