Once you’ve made the exciting decision to buy a car, the next step is figuring out how you’ll finance it. We’ll break down two popular car finance options so you can decide whether getting dealer finance or a car loan is the best option for you.
Whether you decide on dealer finance or a car loan, the basic process of car finance is pretty much the same. In both cases, a lender will allow you to borrow a certain amount of money in order to purchase a vehicle. You’ll then need to pay back the loan over a set period of time (normally one to seven years) and pay interest on the loan as well as some lender fees. In some cases, you might also have a balloon payment, which is a lump-sum payment that is due at the end of your loan period. This requires you to carefully manage your finances in order to meet this financial obligation but also means that your regular monthly payments will be lower.
What is a car loan?
As the name suggests, a car loan is a type of finance that you can use to purchase a car or any other type of vehicle. The two main types of car loans are secured and unsecured. With a secured loan, your car is used as collateral against the loan, while with an unsecured loan, you don’t need to use your car (or any other asset) as security against the loan. Secured loans are normally used for new cars and offer lower interest rates. By comparison, unsecured loans are best suited to older and used cars and are accompanied by a higher interest rate.
Car loans typically have a loan period between one to seven years, though this varies between lenders. You can choose from a wide variety of lenders (many of whom are on Driva’s lender panel!), including traditional banks and non-bank lenders.
Advantages of car loans
Available for new and used cars
No matter whether you’re buying a brand new car straight from the dealership, or a used car via a private sale or auction, there will be car loan options available to you.
If you’re taking out a car loan, you have a wealth of lender options available to you. At Driva, we work with a panel of more than 30 lenders in order to find you the best loan option and give you the confidence that you’re getting the best rate possible. You’ll also have more choice over the type of car you’re buying and where you’re buying it from.
Car loans can offer a large amount of flexibility, though the degree of flexibility will vary between lenders. Many lenders will allow you to change your repayment frequency or make early repayments on your loan. You also have the opportunity to refinance your loan if you’d like to access even more favourable terms down the line. Because car loans are a fixed rate product, meaning the amount you pay each month won’t change over the duration of the loan, the only way to access a lower rate is to refinance your loan.
Drawbacks of car loans
Higher interest rates
One of the main drawbacks of car loans is that they can have higher interest rates compared with dealer finance options. You also might find it harder to negotiate on loan terms. However, because there are so many lenders and finance options on the market, if you’re not happy with the first loan option you see, you can just keep looking!
Slower approval time
After your application has been submitted, approval tends to take between 2 hours and 2 days depending on your chosen lender’s turnaround time. By comparison, dealer finance can often be approved on the spot.
What is dealer finance?
Another popular finance option is dealer finance, which is a type of loan that you can obtain through a car dealership. Dealer finance allows customers to drive away in their new car quicker and helps the car salesperson close the deal faster. They often offer a lower interest rate than standard car loans, but frequently require balloon payments to be made at the end of the loan term. With dealer finance, loan terms tend to be between three and four years.
To qualify for dealer finance, you’ll normally need to have a pretty good credit rating, so if you’re worried about your credit history, this might not be the best option for you. If you want to check what your credit score is, you can do so for free with our friends at Equifax.
Advantages of dealer finance
Lower interest rates
Dealer finance often offers lower rates than traditional car loans (but they also often require a compulsory balloon payment). These low rates may only be available on specific makes and models.
Dealer finance is a really convenient option because you can go to your local dealership, decide on a car, organise finance and drive away all in one day. The dealer will take care of the entire finance process for you, so you can spend less time comparing options and get on the road faster.
In some circumstances, you might find that some aspects of the finance process can be negotiated with the dealer. If you mention that you’re considering other finance options, you might be able to negotiate a better rate.
Drawbacks of dealer finance
Not available for used or older cars
Dealer finance is normally only available for newer cars, so if you’re looking to buy a used or older car, this finance product might not be available to you.
Often require balloon payments
Dealer finance arrangements often require balloon payments to be made at the end of the loan period. While this gives you the flexibility to make smaller monthly payments throughout the duration of your loan, you’ll need to budget carefully to ensure you’re in a stable financial position to make a large final lump-sum payment at the end of the loan.
If you’re considering dealer finance, it’s important that you assess your own personal and financial situation and decide if it’s the right option for you; higher monthly repayments with no balloon payment to be paid, or lower monthly repayments with a large lump-sum amount payable at the end of your loan term.
Don’t have the ability to shop around
With dealer finance, you don’t have the ability to shop around for the best finance option. While this simplifies the process, it also means that you might be missing out on a better deal elsewhere. Also, keep in mind that even though you might be offered a low-interest rate, this may be a sales technique used to encourage the sale of the car at a higher price.
So which is the best option?
Whichever finance option you choose, dealer finance or car loan, the most important thing is to take your time to fully understand all of the fees, charges and terms and conditions of the loan you’re agreeing to. Feel free to take your time and don’t feel pressured into making a decision on the spot! You can also use our car loan calculator to get an idea of how much you could borrow and the interest rates you might be eligible for.
Getting a loan through a car dealership might be the quicker option, but make sure you take a careful look at the interest rate, fees and flexibility of the loan before agreeing to anything. If you decide to take out a car loan instead, you’ll have the opportunity to compare a number of different lender options in order to find the perfect loan option for you.
It can also be a good idea to think about what time of year you’re looking to buy a car. With dealer finance especially, you’ll probably find that certain periods of the year, like the end of a financial year, are a great time to buy a car as dealerships are looking to move a large amount of stock.
In order to be eligible for either dealer finance or a car loan, in most cases, you’ll need to be over 18 years old, and an Australian citizen or permanent resident.
Both finance options can be appropriate ways to finance your new car. The key is assessing all of the options available to you (and the fees involved with each) to find out the total cost of each loan option, and work out which one is cheapest and best suited to your personal circumstances. Also, be sure to check out our guide on how much to spend on a car so you can proceed confidently on your vehicle search journey with a set budget in mind.
Deciding between dealer finance vs taking out a car loan is a big decision, so it’s important to weigh up the advantages and drawbacks of each finance option before making a decision. If you decide to get a car loan, you’ve come to the right place!
To get your personalised quotes (with no impact on your credit score), you’ll just need to tell us a few details about yourself and the type of new or used car you’re looking to buy. From there, you’ll be able to access your Driva Dashboard and view all of the competitive rates that you’re eligible for. Once you’ve decided on a lender, the approval process generally takes between 2 hours and 2 days. After that, you’ll just need to provide us with proof of your comprehensive car insurance and vehicle details, and you’ll be ready to drive away!
If you’ve got car finance questions, feel free to get in touch with our friendly finance team. Give us a call on 1300 755 494 or email us at firstname.lastname@example.org.