Mozo guides

Car loan versus car finance - what's the difference?

family buying a new car with car loan or vehicle finance

Buying a car, whether new or second hand is an exciting time. 

But what about the cost? Whatever the situation, it's important to figure out what you can afford and determine how you're going to pay for it. While come may opt to purchase a car upfront with savings, there are other options: these include a car loan or through dealer finance. 

 So what’s the difference? Let’s take a look.

What’s the difference between dealer finance and a car loan?

Financial convenience or a better deal? Theses are the things you need to think about before securing an amount from a lender to buy the car of your dreams.

Let’s explore the different types of car loans that you can choose from:

Dealer Finance

  • Are you prioritising convenience over the better option for you? Sometimes considered to be convenient and a one-stop-shop finance solution available at car dealerships at the time of purchase. To qualify, you need a pretty excellent credit rating. Although not everyone decides to purchase a vehicle with the dealer’s finance, it certainly is a good option if you haven’t had time to secure a car loan elsewhere and/or want to avoid paperwork dealings in securing a loan (since the dealership usually completes the process on your behalf). Just make sure it actually is the best option!
  • Can you trade it in? If the interest offered is incredibly lower than a typical bank car loan, you need to question the integrity of their offer. Will you get less for your trade in to compensate for the low rate? If you can't, that will make selling a financed car a real struggle. 
  • Is there a balloon payment? Another thing you need to understand is the ‘balloon’ payment option. This is when you opt to pay much less in your car loan repayments and at the end of the term you pay a lump sum (like $10,000 or whatever the agreed amount of money is). But this scenario begs the question - is it worth paying considerably less for your monthly repayments when you have a heavy amount that’s ballooned at the end? It's important to assess your own situation and decide what's best for you - higher repayments but being debt free at the end of the term, or lower repayments, with a large payment to make at the end of the loan.

Car Loans

Think of it as a personal loan. This is usually an agreed amount of money you have arranged and secured to borrow from a financial institution. You can choose to go to your regular bank or many of their competitor banks or unions. Walking into a car dealership with a pre-secured loan amount gives you greater negotiating power. Once you’ve secured an amount you’re happy with, you can then go auto shopping! 

Let’s explore the different types of car loans that you can choose from:

Type of Car LoanProsCons
Secured (the vehicle you buy is usually used as security on the loan)You may be able to secure a cheaper interest rate with a secured loan, which means your overall repayments will be easier on the pocket too.With a secured loan the dealer can repossessed your vehicle should you default on the repayments. Make sure you fully understand what you’re signing up for. If you lose your job, for example, do you have a plan B to fall back on?
Unsecured (a higher risk loan because you’re not placing an asset against your loan as security)Allows you to repay your car loan without tying an asset down (no risk to your new car).Expect to pay higher rates for your car loan if it’s unsecured. Remember, higher rates, means higher repayments
New Car (can only be used on cars within a certain age range)Apart from the new car smell, you also usually have full new car warranty. This means that if a serious fault is found, you won’t be out of pocket thousands of dollars. In some instances, if your new car is found unfit to drive, they may even replace it.When securing a new loan for a car, it’s important you understand what all the hidden extras the dealer tries to sell you. Some of these features could be anything from upholstery care to extended warranty. 
Used Car (requirements will vary but more flexible for older cars)Used car loans can have lower rates because the vehicles can be lower value than something brand new.You're not likely to get great trade-in value for a used car so you might want to make sure your heart is set on this vehicle - and make sure it's in tip-top shape!
Green Car (can only be used on cars that meet certain environmental standards)You'll often get a much lower rate as an encouragement to select a car that doesn't run on petrol or diesel. These loans can only be used on certain qualifying models, so make sure the car you're interested in fits the requirements! 

Still undecided? Use Mozo’s car loan comparison calculator to give you a better idea on what to expect before singing on the dotted line.

Buying your next car

We tend to spend a lot of time driving, and also a lot of money. A car purchase is thought to be the second most expensive asset any one person may own, that is, next to a residential or investment property. So a serious purchase such as a car needs some careful thought and consideration. Here a some tips to help you get started:

  • Don’t apply for multiple loans at the same time as this can affect your credit rating.
  • Research, research, research! Don’t be swayed by the first car you see. Use the internet to help you decide what features, colour and other elements are important to you.
  • You may be able to afford the monthly repayments on a $50,000 car loan, but do you really need it? Everything else being equal (like fees and interest rate), a larger loan amount means you'll wind up having paid more interest at the end of your loan. And on an asset that depreciates as quickly as a car, ask yourself if that extra splurge is really a good decision.
  • Organising your finance before walking into a dealership will give you more negotiating power.
  • Always negotiate. Even if you opt for dealer finance, push the price down for as much as you can. If you’re not happy with the end result or if you feel like you’re being bullied to accept certain conditions, tell them you’ll have a think about it. Your sales consultant may be able to magically ‘make things happen’ for you.
  • Negotiating on price is not the only thing you can do. Ask for the sale to include things like: warranty car service, on-road expenses, window tinting etc.
  • Avoid purchasing extended warranty. This is usually a money making con that uses fear to sell you something you don’t need. Essentially, after the initial factory warranty ends and your car needs something, you'll be able to assess the expense, compare quotes and pay for it that way.
  • Have you thought about purchasing a demo? You could save thousands in the long run. Sure it may have some kilometres on the clock, but it shouldn't have sustained any real wear and tear. Most of that mileage will be from test drives.
  • That incredible pink hue is great on a cupcake, but on your car? Sticking to more standard colours will help the sale of your car if you decide it one day part with it (getting you a better price in return).
  • Trading-in is pretty common and can shave off a few dollars from your purchase price. But have you thought about selling it privately? You’re likely to get more $ for your car that way, while still being able to reduce the cost of your new/used car with your negotiating prowess.

Looking to sell a financed car? Read our how-to guide.

Sara Borman
Sara Borman
Money writer

Using her Bachelor of Communications in Writing, Sara has spent her professional career creating content and crafting copy. Her writing has been published in academic journals and literary anthologies in the US and Australia. She’s determined to make the world of finance accessible and loves finding a way to make money interesting to the everyday person.

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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