Car loans vs dealer finance: A crash course
- Car loans and dealer finance can both work, but the cheapest-looking option isn’t always the best once you factor in fees, balloon payments, and the total cost over time.
- Car loans usually offer more flexibility and transparency while dealer finance prioritises convenience and quick approvals, sometimes at the expense of higher long-term costs.
- Comparing options, doing the maths and negotiating - especially by getting pre-approval or knowing market rates - can help buyers choose finance that suits their circumstances and avoid overpaying.
When it comes to buying a car, choosing the right financing option can be just as important as selecting the car itself. It's definitely worth taking the time to ‘kick the tyres’ and do the calculations first to ensure you’re not getting ripped off.
Here’s a crash course on comparing car loans and dealer finance, where we look at the differences plus some of the pros and cons associated with each.
Car loans & dealer finance: What's the difference?
A car loan is a type of personal loan used to purchase a car. They're generally ‘secured’ personal loans, with a car acting as collateral (security). Though, some might prefer an unsecured car loan as they can allow for greater flexibility when upgrading or selling a vehicle.
Dealer financing is a type of loan offered by car dealerships that can help the salesperson close the sale faster. Dealer finance may offer lower interest rates than a standard car loan, but generally require a balloon payment and can limit a buyer's negotiation power.
Other key differences between car loans and dealership finance include:
- Choice of cars
Dealer finance programs are usually limited to new cars, whereas car loans can be taken out for new or used cars for sale from dealerships or private sellers. - Balloon payments
Many dealer finance options offer lower repayments by adding a balloon payment, which is a lump sum payment - often thousands of dollars - due at the end of a loan term. - Approval times
Car loans typically take hours or days to be approved while dealership finance can often be processed on the spot. - Refinancing potential
Refinancing a car loan can help a car owner save money if their circumstances change down the track, while refinancing dealership finance may not be possible.
Savings.com.au’s two cents
Car loans and dealer finance are both valid options for financing a car. The key to getting the best deal is to know all the options available to you (and their shortcomings) and to do the calculations to understand the total cost of each option. Of course, you should also consider what your needs are - the cheapest option won't always be the most suitable.
Car loans: What you should consider
Comparing car loans generally involves looking at interest rates available and weighing up fees. Such fees are made simpler to compare thanks to the comparison rate, which considers the overall cost of a set loan - interest and fees included.
Secured or unsecured car loan?
When thinking about a car loan, it's also worth analysing what your future plans are regarding the car you're buying.
If you think you'll want to sell the car in the near future or upgrade your wheels after a few years, it could be worth searching for an unsecured car loan or one with a shorter loan term.
That's because the lowest-rate car loans will likely see your car acting as security of the loan. Thus, you might not be able to sell the car before repaying the loan, or you'll have to go through your lender in order to sell the car - as it has an interest over the vehicle.
An unsecured car loan (also known as an unsecured personal loan) also allows you to buy whatever car you'd like, as your lender will have no interest in your wheels once it's funded the loan.
Tips on getting a car loan
- Shop around and compare interest rates and comparison rates
- Use a car loan calculator to get a good idea of how much the car loan might cost you
- Avoid applying with multiple lenders - this can hurt your credit rating
- Consider getting pre-approved for a competitive car loan prior to shopping for cars (this can help you negotiate a better dealership finance deal too)
In the market for a new car? The table below features car loans with some of the lowest interest rates on the market.
| 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 |
Dealership finance: What you should consider
Car dealerships often offer finance on the spot, which can be convenient if you want to drive away quickly. However, it doesn’t always offer the most competitive rates and the true cost can be easy to overlook.
Dealership finance may come with additional fees or conditions that limit your flexibility, such as restrictions on early repayments or refinancing. In some cases, the finance offer may also be tied to specific vehicles or deals.
On a positive note, dealership finance can sometimes be negotiated. Before approaching a dealership, it’s worth comparing car loans from banks, credit unions, and non-bank lenders. Knowledge of what's available on the market can put you in a stronger negotiating position, as you'll be more likely to recognise whether finance offered to you by the dealership is competitive.
You might get a better deal without dealership finance
A key aspect of dealership finance to watch out for relates to a car's price tag. Often, dealerships are more willing to negotiate on price if you're paying 'cash', e.g. not taking out dealership finance. These 'cash deals' are generally also available to buyers paying for their wheels with a car loan from an outside lender - after all, the source of the cash doesn't matter to the dealership.
On the other hand, a dealership might offer a more enticing deal to those taking out dealership finance, and they might recoup these costs through higher interest rates or fees over time.
Another thing to watch out for is upselling. Dealership finance can be bundled with add-ons like extended warranties or servicing packages, which can increase the overall cost of your car purchase.
Tips on financing a car through a dealership
- Take your time to fully understand all fees, terms, and conditions before you agree to a deal
- Check if a balloon payment is compulsory and assess if that's right for your finances
- Ensure you’re getting a good price - don’t let a low interest rate distract you from the true value of the car
- Compare what car loans are available, calculate what they’ll cost you, and use these calculations to negotiate
- Consider buying a car during a sales period, such as the end of a calendar or financial year, when dealerships might be more inclined to offer better value
What is 0% car finance?
From time to time car dealers may advertise '0% car finance' offers. As the name suggests, under a 0% car finance deal you don’t pay interest on your repayments. Sounds too good to be true, right? It’s important to bear in mind that these advertisements aren’t always what they seem and can have hidden costs involved.
These deals can involve paying a higher price on the car, a large balloon payment at the end of the term, or are only 0% interest for a set ‘promotional’ period before reverting back to a generally higher interest rate. Be sure to do your research and read the terms and conditions (Yes! Read the details…) so you know what you’re signing up for.
Dealer financing vs bank loans: Pros & cons
A quick look at some of the pros and cons of financing a car through dealership vs a car loan can help give you a feel for what’s suited to your circumstances.
✅ Dealer finance: Pros
Convenient
Dealer finance can be arranged on the spot, allowing you to choose a car, organise finance, and drive away the same day.Potentially very low advertised rates
Some dealer finance offers advertise significantly lower interest rates, which can be appealing at first glance.Negotiable terms
Dealerships may be willing to negotiate aspects of the finance to win your business, particularly if you mention competing loan offers.
❌ Dealer finance: Cons
Often limited to new vehicles
Dealer finance is usually only available for new cars, which tend to depreciate faster and cost more upfront.Hidden costs
Ultra-low interest rates may be offset by a higher purchase price, fees, or expensive add-ons.Balloon payments
Many low-rate dealer finance deals require a large lump-sum balloon payment at the end of the loan term.Upselling risk
Finance may be bundled with extras like extended warranties or servicing packages, increasing the total cost.Less flexibility later
Refinancing or exiting the loan early can be more difficult or costly.
✅ Car loans: Pros
Broader choice of vehicles
Car loans can be used to buy new or used cars, including vintage or eco-friendly vehicles, from dealers, private sellers, or auctions.More lender choice
You can shop around between banks, credit unions, and non-bank lenders to find competitive rates and features.Greater flexibility
Many car loans allow for changes to repayment frequency, fixed or variable rates, or refinancing down the track.Clear pricing
Independent lenders usually separate the car price from the finance, making costs easier to compare.
❌ Car loans: Cons
Higher advertised interest rates
Car loans generally come with higher rates than dealership finance solutions.Approval time
Loan approvals can take anywhere from a few hours to several days, depending on the lender.Less negotiation on loan terms
Car loan lenders are generally less flexible on interest rates and conditions than dealerships.
Should you go to a broker for a car loan?
A car loan broker can help you compare loan options from multiple lenders, which may save you time and effort if you’re not keen to shop around yourself. Brokers typically work with a panel of lenders and can match you with a loan based on factors such as your credit history, income, and the type of car you’re buying.
Importantly, licensed brokers are required to act in your best interests, meaning they must prioritise your needs and financial situation over their own commissions when recommending a loan. Lenders are also required to assess whether a car loan is suitable and affordable for a borrower.
This differs to dealership finance, which is often focused on facilitating a quick sale and getting buyers into a vehicle on the day. While dealership finance can be convenient, it’s still important for buyers to independently assess whether the loan terms and repayments are appropriate for their circumstances.
