Dealer finance or car loans? Buying a car, new or used, is interesting. But in our attempt to find the perfect car, it’s all too easy to overlook a little detail; exactly how much are we going to pay for this new set of wheels?
Fortunately, there are several options for those of us who don’t have an extra $20,000 in our back pockets lying dormant; choose your dealership financing or go out and get a car loan from a brokerage firm or the bank. Both have their pros and cons, but which one to choose?
What are the differences between dealer finance and car loans?
Dealer finance occurs when the dealership contacts your bank or preferred lender and helps you get a car loan through them. They make all the arrangements for you while you do very little. Sounds ideal, doesn’t it?
A car loan is when the buyer (you) seeks a loan from a broker or directly from a credit union, bank, or finance company. You organize all the details of the loan yourself. You then use the money to buy the car from the dealership in cash.
The common feature between dealer financer and a car loan (through a broker or not) is that all loans will have similar components that you need to compare; interest rate, comparison rate, term, and repayments. It is important to consider and compare your options.
Why choose dealer finance?
It’s a very familiar situation. A buyer chooses a car, goes through all of the details, and then there’s an “oh, forgot” moment when the dealer asks if they should finance the car. And that’s why many buyers go with the flow and go for dealer financing. But that’s not the only reason financing may seem like a good option.
The advantages of dealer finance
- It’s a simple process: you tell the dealership how much you can pay each month, and they work out all the details with the bank or lender.
- The dealer makes it happen: the dealer invests in this loan application; after all, they want to sell the car. And for this reason, they will do their best to make sure you get your funding.
- This is an option if you have bad credit: some retailers offer buyers with bad credit financing packages, which is a big plus.
However, these benefits come at a price.
Disadvantages of dealer finance
- It can cost more: You also risk the dealer marking your monthly payment to make a small profit for them. The interest rate may seem very low, but the cost of the car has gone up. It is not a good idea to think that you are already making money selling your car.
- The dealer has all the cards: the dealer has full control over the situation. You may even feel obligated to the person helping you get the loan for your new car.
- You have to trust the dealer: With you completely removed from the negotiating process, you are simply relying on the dealer to find the best deal in the market for you. This is unlikely to be the case.
Why opt for a car loan (and a broker!)
As I said before, a car loan means that you are the one who contacts the broker, the bank, or the financial company. And while it may seem like a monotonous exercise, it can be worth it in the long run.
The advantages of a car loan
- Best interest rates: Dealers offer their interest rates, sometimes increasing bank charges. Getting a car loan from the bank will help you get the best deal possible.
- Even more bargaining power: this time with the dealer. A lender can help you get pre-qualified for a loan by telling you how much you can borrow. This is a big plus when talking to your dealership because their help is no longer needed to finance your car.
- More leeway: to the bank lender, you are more than a name on the balance sheet. Talking and negotiating with your lender can give you some freedom in the future if there is a problem with late payments or confusion with direct debits.
- More Negotiating Power: When dealing directly with a broker or creditor, you can negotiate the structure of the payments and, most likely, the interest rate (although most banks will accept this).
Disadvantages of a car loan
We’re going to be completely honest, and there aren’t that many.
- It is less convenient: you have to call the banks yourself and fill out forms online or at the bank.
Tips for financing a car through a dealership
- Check that paying a lump sum (such as a prepayment at the end of the loan term) is a mandatory part of the business. Does it suit you well?
- Compare available auto loans and estimate their cost. Show the retailer these cost estimates to see if they can provide better value.
- Find out what the comparison fee applies to: is it based on the total amount and length of the loan?
- Make sure you get a good price for your car. Don’t let a low-interest rate distract you from the real value of the car, which should be the price.
- Make sure you understand all of the rates, terms, and conditions you are signing up for before agreeing to a deal. Don’t be forced into hasty decisions by car dealerships.
- Reconsider the purchase of new products. A new car will lose a significant portion of its value when it is picked up by the dealership, in which case it will immediately be classified as “used.” You can also consult your dealership to find out about used car financing services that you may have.
- Think about your timing. Certain times of the year offer better dealer financing opportunities than others, such as the EOFY period (May/June) and license plate sales (start/end of a calendar year).
Tips for getting a car loan
- Avoid applying with multiple creditors. It can affect your credit rating. You can compare auto loans without applying.
- Compare interest rates to maximize your chances of getting good value. Use comparison rates when comparing (these may better reflect the total cost of the loan and may include interest and fees)
- Use an auto loan calculator to get a good idea of the cost of the loan.
So what is the best option? Of course, everyone has their preferences, but it must be said that applying for a car loan through a brokerage or solo seems to be the best option here. You get good interest rates, which means lower payments, and you have great negotiating power to help you negotiate a better deal.