Car loan vs dealer finance

You’ve decided you need to borrow some money to buy a new set of wheels, but how? A car loan or dealer finance are two roads you could take.

Car loan vs dealer finance. Picture: iStock

Buying a car can be an exciting process, until you start wading through the various finance options. But choosing your finance doesn’t have to be overwhelming if you’ve done your research.

That’s why we’ve pulled together this information to help you compare car loans and dealer finance so you can pick an option that’s suitable for your circumstances.

What is a car loan?

When a bank or other financial institution loans you money specifically to spend on a car, that’s a car loan. Car loans are often personal loans, but there are options for business loans too if you’re going to register and use the vehicle for business purposes.

What is dealer finance?

Instead of organising a loan yourself, some car dealerships will be able to arrange finance through their affiliated lender. In some cases, car dealers may have their own branded car finance, for example BMW finance. Essentially, it is a personal loan or car loan that is offered through your car dealership.

Choosing your new wheels may not be the only decision you need to make when buying a new car. Picture: iStock

Key differences between car loans and dealer finance

Car loans and dealer finance are both loans, and they can be granted for similar loan amounts. The main differences may relate to cost, convenience and eligibility criteria.

Convenience

When you find your dream car, it can be a hassle to go back to a bank and apply for a loan. Dealer finance may allow you to choose a car and buy it on credit at the same time.

Cost

In some cases, a car loan you source yourself may be cheaper overall than dealer finance. While this is not always the case, it can be a good idea to compare a range of options to see what will be suitable and more cost effective for you. You can compare to see what has lower interest rates, but make sure you also consider any fees.

Eligibility

The lending criteria for car loans are similar to the lending criteria for most other loans. This means lenders will expect to see regular income, not too many liabilities, plus a reasonable credit score and credit history. Dealer finance options are bound by the same requirements to complete an assessment of your ability to repay the loan, however may only make their loans available to those purchasing their vehicles.

There may also be different loan options for new and used cars. You should also check if the loan you’re considering includes a balloon payment (a lump-sum payment at the end of the loan period), which may make the regular repayments appear lower.

Differences between car loans vs dealer finance, can sometimes relate to cost, convenience, and eligibility criteria. Picture: iStock

Pros and cons

While it may seem like one option might be better than the other, each has its place. As these options are very similar, many of the pros and cons are aligned. You can find out more about the pros and cons of car loans and compare a range of car loan options on our car loans comparison page. We have included here some of the advantages and disadvantages of both here.

Advantages of car loans and dealer finance

Car Loans

– Can be used for new and used cars

– More lenders and therefore more choice

– Flexibility. You may be able to choose between variable and fixed interest rates, a redraw and more

Dealer Finance

– Convenient. Choose a car and buy on credit in one trip

– May be able to be negotiated with a better discount on the car you choose

Disadvantages of car loans and dealer finance

Car Loans

– You may have to leave the dealer to apply for your loan, if you haven’t arranged pre-approval

Dealer Finance

– May offer less flexible options

– Usually only offered to customers who purchase their vehicles from them

Consider your financial situation before deciding to buy a car. Picture: iStock

What to consider when choosing between a car loan or dealer finance

Whenever you’re choosing a loan or other form of credit, it’s vital you carefully review the terms and conditions in the context of your goals and financial situation. It’s especially important that you weigh up the pros and cons of each option and, because everyone is different, get an understanding of what options might better suits your own needs.

News Life Media Pty Ltd (ACN 088 923 906, credit representative number 541905), is a credit representative of QED Credit Services Pty Ltd (Australian Credit Licence 387856). The ‘compare’ pages of this website are provided by Fair Comparison Pty Ltd (ABN 48 647 552 958, credit representative number 530417) as a credit representative of QED Credit Services Pty Ltd (Australian Credit Licence 387856) to compare a range of credit card, home loan, personal loan and car loan products. News Life Media Pty Ltd and Fair Comparison Pty Ltd may receive a fee if users click through, apply and/or successfully acquire a loan or credit card product from or through a product provider.

News Life Media and Fair Comparison provide information relating to credit products offered by banks and other credit providers. We are not providers of loan, credit or any other financial products. While we aim to provide information about a variety of products, we do not provide information about all products or product features available to consumers - there may be alternative options available elsewhere. We do not recommend or assist you to apply for specific products. Should you choose to apply for a product which is listed, you will deal directly with the provider of the product or its broker/representative. We aim to provide useful and up to date information, but you should always carefully check product information with the product provider prior to applying for or taking out a credit product. If you are unsure you should seek clarification from the product provider or independent financial advice.

Originally published as Car loan vs dealer finance