Should I Get a Dealer or Bank Car Loan?
The one thing that can really save you thousands on the purchase cost of your next car is considering your car loan options before you get to the point of purchase.
Knowing what to expect in fees and interest rates before you get to the dealership will mean that you can make an informed decision on whether the dealer finance is a good deal.
How to get a bank car loan
You'll usually arrange a bank car loan separately to the purchase of your car. Most people will get a pre-approval for a bank car loan, giving them an exact budget to help them find the new car that they want.
The pre-approval doesn't give you the final terms of the loan, but you will know the loan term, the interest rate, and terms of the loan including any fees.
The pre-approval will also give you a maximum amount that the bank is willing to lend you, based on your income and expenses.
You might choose to apply for a bank car loan with the bank your other accounts are held with, or compare different options online, or use a broker.
Once you've selected the bank car loan to apply for, you'll usually need to submit:
- Personal details
- Some info about the car you hope to purchase
- Three months payslips, or alternative income verification
- ID and two referees
If you use a broker, you have the advantage that they will assess your application against the lender criteria to see if you will be approved before submitting the application. This means you are less likely to be turned down for the car loan that you want.
How to get a dealer car loan
Getting a dealer car loan can be a lot less work - but you can get a much better deal if you've done a little preparation beforehand.
This might mean getting a pre-approval for a bank loan, or at least some certain quotes so that you'll know if the dealership is offering you a good deal. If your pre-approved loan is a better deal, you can still go ahead and buy the car on the spot.
There are situations where the dealer car loan offer will beat the bank car loan, especially for manufacturer finance deals on new cars.
Things to look out for:
- Low-interest rate deals may only cover the first twelve months of the car loan. Make sure you know what the interest and repayments will be after the low-interest period and that you can afford this on your current income.
- Know if there is a balloon payment due at the end of your loan. A balloon is a lump sum that needs to be paid to finalise the loan contract, and it's used to reduce the repayments on your loan.
If you can't afford to pay it out, you can refinance the balloon - but this will add to the total cost of your loan.
- Trade in value: when you negotiate the trade in on your old car, will you be getting less than its really worth in return for a low-interest rate?
- Know your car purchase price: it's easy to get caught up in your repayments figure and lose sight of what you're actually paying for the car.
Dealer or bank car loan - which is better?
You can often negotiate the costs of your car loan, whether you are using a dealer or bank.
Your best bargaining tool is a few quotes from different financiers that you can use to get a better car loan from the dealer or bank that you prefer.
|Bank Car Loans||Dealer Car Loans|
|Require a separate transaction||Arranged on the spot when you buy the car|
|Choice to purchase private sale, new or used car||Car usually purchased at same dealership|
|Purchase Price negotiated separately to car loan||Finance deal may bundle and inflate purchase price|
|Focus is on what you can afford||Focus is on the car you want to buy|
|Banks usually have fixed loan terms on offer||More opportunity to negotiate the loan terms|
|One bank has a limited range of car loan options||A dealer may have access to more than one financier|
|Might be best for used car loans||Can offer low rate manufacturer financing on new cars|
|Car loans for bad credit are possible||You usually need good credit|
|Loan may be used for other purposes||Car loan funds are only used to buy the car.|
Whether you choose to take a dealer or bank car loan in the end, you'll know that you're getting a good deal if you've compared some finance options before choosing how you'll pay for the car.
You can do this by getting a quote through a car loan broker, letting them compare options on your behalf, or by doing your own research on dealer or bank car loans.