- Car dealership finance may not provide the best options on the market for all buyers
- Dealer finance can sometimes offer lower interest rates than standard car loans but may come with higher fees, less flexibility, and mandatory balloon payments
- Some dealers may also try to package junk insurance add-ons with their finance or offer extended loan terms that will see the buyer pay more in interest
Many people suspect car dealers may not necessarily have their best interests at heart. After all, car salesman consistently take out top spot on Australia's least trusted profession surveys, pipping real estate agents and politicians.
But buying a car is a daunting process, so it's understandable some buyers may choose to simplify things by signing up to finance through the dealership.
What is dealer finance?
Dealer finance can be any type of loan or lease arrangement offered by car dealerships, typically offering convenience and fast approval times. The finance is generally provided through third-party lenders, often at lower interest rates than many standard car loans.
But dealership finance often comes with higher fees, less flexibility, and built-in balloon payments. These can see the buyer up for a significant lump sum at the end of the loan period (more on these below).
So while the interest rate may seem enticing, be warned, you may be getting into more than you bargained for.
ASIC review of motor vehicle finance
Australia's financial watchdog, the Australian Securities & Investments Commission, launched a renewed investigation into the car finance sector in March 2025 which (as of January 2026) is still underway.
It's so far identified issues including:
- problematic sales tactics
- lenders failing to regularly audit finance distributors
- excessive loan establishment costs
"We saw instances of loan establishment fees as high as $9,000 on a loan of $49,000," ASIC Commissioner Alan Kirkland said.
ASIC has also found almost half of all consumers who defaulted on their car finance repayments did so in the first six months of their loan, raising questions about whether they'd been given loans they could not afford to repay.
The review follows an earlier review into the sector in 2018, with findings of the most recent review due for release later in 2026.
With that in mind, let's consider some of the pitfalls to look out for before you sign on the dotted line of taking up dealer finance.
1. Balloon payment included in your finance package
Structuring your loan to include a balloon payment may seem like an attractive option as it will effectively lower your ongoing repayments.
A balloon payment is lump sum payable to the lender at the end of a car loan term - typically 30-50% of the loan amount.
However, the downside of a balloon payment is that while regular repayments drop, it effectively increases interest costs. It also takes longer (months or even years) to build up equity in the vehicle.
Balloon payment example:
Let's consider a standard $40,000 car loan financed over five years at an 8% p.a. interest rate - with and without a balloon payment.
Monthly repayments Total interest cost No balloon $811 $8,663 30% balloon $648 $10,864 Despite a drop in monthly repayments of $163 with a balloon, it comes at the expense of an extra $2,201 in interest costs over the five-year loan term.
At 36 months, a popular timespan for upgraders, those with a balloon will still owe $24,553 on their loan - $6,620 more than if they didn’t have it.
This lower equity position will see the borrower have to pay out considerably more on their old car loan as well as having less funds to contribute towards a loan for their new vehicle - a cycle that can continue indefinitely.
2. Selective loan presentation
Car dealerships often access only a handful of lenders, possibly limiting you to a non-competitive lender in terms of interest rates, low fees, and additional features.
Some dealers may present you with one or two lenders who have approved you for a car loan. With this approach, you have no way of knowing whether other lenders may have approved you too, potentially with a lower interest rate or fees or conditions that would better suit your financial position. In such cases, you are placing your trust in the dealer that they have presented you with the best deal possible.
It's worth remembering a dealer’s goal (most of the time) is to make as much money from you as possible. Conducting your own research on various car loan products could greatly impact the interest rate and loan conditions you are offered.
What is a competitive car loan interest rate?
The products below offer some of the most competitive interest rates on the market and are a good place to start:
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Vehicle Type | Maximum Vehicle Age | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 7.07% p.a. | $579 | Variable | New | $8 | $400 | $34,749 |
| Promoted | Disclosure | |||||||||
5.67% p.a. | 6.10% p.a. | $575 | Fixed | New | $0 | $350 | $34,524 |
| Promoted | Disclosure | |||||||||
5.95% p.a. | 5.95% p.a. | $579 | Fixed | New | $0 | $0 | $34,757 |
| Promoted | Disclosure |
3. Zero finance - discounted dealer rates
If you've ever seen a car dealership advertising 0% car finance offers, they may seem too good to be true - and that's usually because they are.
As the offer suggests, under a 0% car finance deal, you don’t pay interest with your repayments but there may be some hidden costs that will hit you in other ways.
These deals can often involve:
- paying a higher price on the car (sometimes no negotiation is permitted on the asking price)
- a large balloon payment at the end of the term
- 0% interest for a set ‘promotional’ period before reverting to a high interest rate
Generally speaking, if the interest rate is lower than a home loan rate, you need to be questioning the dealer’s motives.
0% finance example:
Dealership A: Car costs $50,000 with an advertised interest rate of 0%. You ask for a discount on the car (as most buyers usually do) but the dealer says there is no negotiation. The estimated loan repayments are $833 a month over five years.
Dealership B: The same car costs you $43,000 (as you were able to negotiate a $7k discount) with an interest rate of 6%. In this case, estimated repayments are $831 a month over five years.
In this case, the $7,000 discount on the car outweighs the higher interest costs.
Moral of the story? Be sure to do your research, check the comparison rate, and read the terms and conditions (the fine print) so you know what you’re signing up for.
Our Car Loan Calculator can also help with the maths.
Savings.com.au’s two cents
This article is not here to rule out car dealer finance altogether. It can be the right option for some buyers as it’s highly convenient (usually same day drive away), relatively simple, and you may be able to negotiate certain aspects of the financing.
But before you apply for finance through a car dealership, it can be beneficial to have applied for car loan pre-approval through a lender. This way, you’ll have:
- an interest rate
- comparison rate
- ongoing repayments, and
- a loan term
to compare when you're discussing finance with a dealer.In other words, you’ll have a better idea of whether you're being ripped off or not. Make sure you also check the features and conditions in the fine print to ensure you choose the best loan product for you - even if it may take an extra few days to take delivery of your car.
4. Car insurance add-ons
When you buy a new vehicle, the car dealer may try to 'add on' insurance. Alas, dealers can overload you with products and choices which may lead you to sign on for so-called 'junk' insurances that may reap dealers high commissions but are of little value to you.
Over a three-year period (between 2013-2015), an investigation of ASIC data found car buyers obtained little, if any, financial benefit from buying add-on insurances, including:
- credit insurance
- gap insurance
- loan termination insurance
- mechanical breakdown insurance
- tyre and rim insurance
A review found car dealers got four times more in commissions ($602.3 million) than consumers received in claims ($144 million).
Not only did the cover deliver greater benefits to dealers than consumers, but many add-on insurance premiums were packaged in with car loans, substantially increasing the loan amount and the interest paid.
As of 5 October 2021, salespeople in Australia must wait four days before selling a consumer add-on insurance. It pays to be aware of this requirement and to consider what insurance products you'll actually need.
5. Extending the loan
To make cars seem more affordable, a dealer may offer an extended car loan term, for example, a six- to seven-year loan.
See also: Which car loans have the longest loan terms?
Stretching out a loan term will effectively lower regular repayments but you will ultimately pay more interest over the life of the loan. It may also see you owing more than your car is worth as your vehicle continues to depreciate in value while your loan balance remains higher for longer.
6. Guaranteed buybacks
A guaranteed buyback is when you and the dealership agree to a pre-determined value to sell the car back to the dealer after the loan term is up and the balloon payment is due.
Essentially, this provides a way of locking in the future value of your car. While this may seem like a good deal, there are usually a number of catches that come along with this type of agreement:
- Mileage estimate - Should you turn up with more kilometres on the car than agreed, you will likely have to pay some hefty fees
- Wear and tear - If the car has rust, scrapes/scratches, dents, immovable stains, ripped fabric, etc., the cost of repair is subtracted from the 'guaranteed' value
- Dealer exclusive - Guaranteed buyback is only available through dealership finance
- Higher interest rates - If the vehicle depreciates more than expected, that loss is on the manufacturer. However, to mitigate the risk, the dealer may charge higher interest rates to begin with to protect itself
