Dealer finance vs car loan

How to get the best deal for your new wheels.

You’ve finally found the ‘the one’; the new car that ticks all the boxes and is perfect for you.

You’ve done the research, read the reviews and taken it for a test drive. The only thing left to do is organise a loan. 

But the options for financing a new or used car can be overwhelming.

RACQ Financial Advocacy Analyst Nathanael Watts shared his tips for finding the right car finance option for you.

Loan amount

Whether you take out a car loan or dealer finance, a car is a depreciating asset so try to borrow as little as possible and pay it off as quickly as you can.

Otherwise you may end up owing more on your loan than your car is actually worth.

It’s important to remember that you can shop around for the type of finance that’s right for you, it doesn’t have to come from the dealer or your regular bank.

Dealer finance

Dealer finance refers to loan options offered by a car dealership which secures the funds on your behalf.

Dealer finance options are usually limited to a specific lender and low interest rates may only be available for certain makes and models.

You may find that the purchase price of a car with a dealer finance interest rate of 0% is more expensive than the same make and model at a higher interest rate as dealers often bundle the car, finance and other optional additions.

You’ll need to work out the individual cost of each item in the bundle to determine if you can get a better deal elsewhere.

The car salesperson may receive commission on your loan which can increase the total loan cost.

Car loans

Car loans from a bank use your vehicle as security against the loan to give you a more competitive rate than with an unsecured personal loan or a credit card. 

This means if you default on your loan you can lose your vehicle. 

Just like home loans, you can often choose between fixed or variable interest rates on your car loan. 

A fixed rate can make it easier to budget as you’ll know from the outset how much your repayments are. 

A variable rate can be changed at any time by the lender which can make your repayments smaller if the rate drops or more expensive if it is increased.

Before signing on the dotted line

Before you sign any loan documents it’s important to look at the total cost of finance including interest and fees.

For example, if you buy a $10,000 car and borrow the full amount at an interest rate of 5.89% over five years, you will pay $1569 in interest over the life of the loan plus any establishment and monthly fees.

You should therefore consider the total purchase price of the car to be $11,569, plus any additional on road costs.

You may decide you would be happy to spend the original purchase price but not the total amount once interest and fees have been taken into account.

At a glance

Car loan   Dealer finance 
Wider range of loans available. Dealer handles the paperwork.
 Using your car as security usually reduces the interest rate compared with an unsecured personal loan.   Dealer commission may increase rates.
 You choose the lender and your loan.   Limited options with specific lenders.

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person’s particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.