Car loan vs dealer finance - what's the difference?

Ready to buy a car? Whether you're eyeing a brand-new vehicle or a pre-loved model, it's an exciting milestone. While some might have savings ready to go, most people need financing. The two main options? Car loans and dealer finance. 

Let's break down what sets them apart and help you make the smart choice for your wallet.

When you're at the dealership, they'll likely offer in-house financing so that you can choose your car and sort out financing all in one place. For buyers with strong credit scores, the approval process is often quick and paperwork is minimal. 

However, be aware that these super-low interest rates might be a red flag. It could mean you're getting less value for your trade-in. Lower rates might just come with a balloon payment too, where lower car loan repayments result in a lump sum at the end of the term (like $10,000 or whatever the agreed amount of money is).

Think of this as a personal loan specifically for your vehicle purchase. By arranging it directly with a provider before car shopping, you'll walk into the dealership knowing exactly what you can afford and with greater negotiating power.

Some of the types of car loans available include:

Secured car loans

A secured loan will often come with lower interest rates and more affordable monthly payments because your vehicle serves as collateral. However, this means the lender can repossess your car if you default on payments. It's essential to have a backup plan for unexpected financial changes.

Unsecured car loans

An unsecured loan means that your car loan isn’t locked down to any assets to the loan. The trade-off is higher interest rates and larger monthly payments because this type of loan is a bit riskier for the lender than a secured loan.

New car loans

Purchasing a new car comes with the security of a full manufacturer warranty and the latest features. However, keep an eye out for expensive dealer add-ons and consider carefully whether premium features are worth the additional cost. Remember, new cars usually depreciate fastest in their first few years.

Used car loans

Used car loans often come with competitive interest rates due to lower vehicle values and more flexible lending criteria. The main thing to keep in mind is that you thoroughly verify the vehicle's condition before purchase.

Green car loans

For environmentally conscious buyers, green car loans offer reduced interest rates on eco-friendly vehicles. While these loans can provide lower rates, they’ll mostly be available for EVs that cost a bit more than your standard ICE (internal combustion engine) car.

When you're ready to make your purchase, make sure that you’re prepared. Start by researching thoroughly online – compare models, features, and prices before setting foot in a dealership. Also, avoid submitting multiple loan applications as each one affects your credit score.

Set a realistic budget that accounts for not just the purchase price, but also running costs and insurance. Remember, while you might qualify for a $50,000 car loan, be sure to consider whether you need to spend that much on a depreciating asset.

Negotiating your car purchase

Walking into a dealership with pre-approved financing gives you significant leverage. Don't be afraid to negotiate, not just on price, but also on inclusions like servicing, window tinting, and on-road costs. If you're not happy with the offer, it's fine to walk away and think it over.

Some of these money-saving alternatives could include:

• Look at demonstrator models, which often offer significant savings with minimal kilometres
• Choose mainstream colours for better resale value
• Consider selling your current vehicle privately rather than trading it in
• Skip the extended warranty, which rarely provides value for money.

Take time to compare your options using our car loan comparison calculator. Remember, a car is often your second-biggest purchase after property, so it's worth getting the financing right. Have a think about your long-term financial goals and choose an option that aligns with your needs and circumstances.

Want to explore your options further? Use our loan calculator or head on over to our car loan hub page to compare providers.