Financing a car through a dealership - is it the right thing to do?
Whenever a new car buyer needs finance, they face a dilemma. Should you arrange for a car loan through a broker, or use dealership finance instead? The answer will often depend on who you ask.
Since every motorist has different needs, it helps to be familiar with the details of financing a car through a dealership before making a decision.
How do rates and fees stack up?
Dealership finance introduces the possibility of another markup being added to your rate. However, many deals allow new car buyers access to low interest rates. Sometimes dealers even offer zero per cent interest rates on particular vehicles.
The interest rates associated with financing a car through a dealership can potentially be quite competitive against standard car loans. Brokered car loans can vary widely and may involve higher upfront or ongoing fees.
How do service levels differ?
One of the drawcards for those seeking dealership finance is that they can combine all paperwork through the same representative. Financing a car through a dealership may also help a buyer feel more confident in their ability to negotiate the vehicle purchase price.
On the other hand, the dealer support for financing matters is less personal once a transaction is finished. A dedicated car loan broker is there to provide ongoing support.
If you decide to refinance your loan in the future, your broker can provide a greater range of options. You will have more choice in the future to source a vehicle or loan from where you want, whereas dealership finance will usually tie you up with them.
At the time of purchase, a standard car loan may also be tailored. You can choose between a wider range of dealerships, vehicles, loan conditions, and terms. Dealership finance is generally set for a shorter term, with balloon payments more common.
Both forms of financing can accommodate bad credit car loans.
Things to be wary of
It’s important to pay close attention to the structure of dealer loans. Even if the deal looks promising on the surface, the same tactics are commonly used from dealer to dealer.
As mentioned earlier, low interest rates are often used by dealers to attract new car buyers. However, some of these rates, and particularly 0% interest rates, are not always what they seem.
You may see the rates apply to a limited range of car models, or for a short, perhaps even ‘limited’ duration. This means your payments could actually be higher than they otherwise would under a standard car loan.
You could also face cash flow problems since you are less likely to have the negotiating power to remove a balloon payment from the contract, or make early repayments without penalty
Another thing to assess is the initial purchase price of the car. Financing a car through a dealership is a bundle solution. As such, it removes the transparency on savings negotiated on the purchase price. There is often more room to transparently negotiate a car price under a standard or pre-approved loan.
The reason for this is because you are not covering the overheads, commission and shortfall in margins that accompany ‘lower’ rates of dealership finance. Therefore, even with a lower interest rate, you could pay more over the life of the loan than someone who further reduces the car price under a higher interest rate.
Case study: Jenny and Ben
Jenny and Ben are both looking for a new car, which retails at $50,000. While Jenny is favouring dealership finance, Ben prefers to engage a broker for his car loan.
By financing a car through a dealership, Jenny purchases the car at its retail price of $50,000 with an accompanying interest rate of 5% p.a. Jenny agrees to a $10,000 balloon payment at the end of the term of 5 years.
Meanwhile, Ben approaches another dealer with pre-approved financing and is able to negotiate the price of the car down to $45,000. Ben, however, must pay 7% p.a. over a term of 5 years.
Across the length of the loan, Jenny will need to make monthly repayments of $797. Total interest costs amount to $7,791 and a payable total of $57,791 including the final balloon payment.
In contrast, Ben will make monthly repayments of $891, for total interest costs of $8,463. Despite the higher monthly payments, the total cost of the loan will be lower, at $53,463.
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Look out for
As a final reminder, new car buyers should always do their homework regarding the best option for you. Financing a car through a dealership may seem like a good proposition on the surface, especially if the advertised rate is low.
There are several traps to look out for that highlight the benefits of a brokered car loan. Here’s a checklist of things to look out for.
- Avoid obscure rate quotes and payment terms that lack flexibility
- Ask for clarity around the retail price of the car and negotiated savings
- Make sure ‘promotional’ or low interest rates are for the life of the loan
- Ensure that the length of the term is adequate to manage payments and cash flow
- Obtain loan quotes from a variety of sources to ensure competitiveness
- Consider applying for car loan pre-approval to improve your negotiating power
- Check eligibility of the car for the interest rate quoted
- Clarify balloon payment commitments and budget accordingly
- Understand what support or refinancing options are available in the future