Should You Apply for A Car Loan Through Dealer Finance or A Broker?

Walking into a car dealership can be a daunting experience at the best of times.

But with Australia’s soaring used car market and new car wait lists that are now extending out beyond two years for popular models, buying a new car has never been more complex.

In days gone by, customers walking into a car dealership held all of the power. With most dealerships carrying more stock than they could feasibly move, they relied on fast talking salespeople and complex finance schedules to secure a profit. Today, customers need to do the leg work and must be willing to pay sticker price for most models, in order to secure their place in the new car queue.

But when it comes to paying for a new car, buyers still hold the power thanks to the range of financing options available. While car dealer finance options may seem attractive, it’s important to understand the finer derails of dealer finance vs. car loans to determine the best rate.

In this article, we’ll explore the benefits and drawbacks of car dealer finance, the benefits, and drawbacks of car loans, and all of the nuances that go along with each to help consumers make an informed financing decision. So, should you apply for a car loan through dealer finance, or through a car loan broker?

What Is Car Dealer Financing & How Does it Work?

Car dealer financing simply refers to finance options that are offered directly through new or used car dealerships at the point of sale. The dealership will work directly with banks or financial institutions to provide car loans directly to the customer that they can use to finance the purchase of a vehicle through the dealership.  

Just like a normal loan, the customer is required to fill out a loan application form which the dealership then provides to the financial institution to determine lending criteria, loan terms, and suitability. The customer will then pay back the loan over a set period of time (usually 1-7 years), with interest added to the top of payments.

Car dealership financing is almost as old as car dealerships themselves and is an essential revenue stream for most dealerships. Depending on the dealership, salespeople will be incentivised to sell finance to prospective buyers because it provides another, recurring revenue stream (a share in the interest paid on the loan) to the dealership.

The sales team is incentivised through bonuses, commission, and other incentives. In many cases, the profit margin on the loan can be higher than the vehicle which means that dealerships make a large portion of their revenue as a loan affiliate for banks or lenders. 

What Are the Advantages of Car Dealer Financing?

For car dealerships, the advantage of providing finance to customers is simple – higher profits, and a recurring revenue stream. On the flip side, some of the benefits that car dealer financing provides customers include:

Convenience: When it comes to dealership finance, this is the big one – convenience. Customers can walk in, test drive, negotiate, and drive away from the dealership with just a small loan.

Easy to secure: Oftentimes, dealer loans can be easier to secure than a conventional loan for some customers. Some dealerships offer options for those with low credit scores (as do many finance brokers).

Trade in value: Dealers may offer a better trade-in price for customers that finance a new vehicle through their in-house financing programs which can reduce the ‘changeover’ cost between the old and new vehicle.

Bundled servicing & insurance: Dealerships may offer servicing, insurance, and maintenance that allows buyers to handle all of their vehicle expenses through a consolidated loan. 

What Are the Disadvantages of Car Dealer Financing?

When it comes to financing a new or used vehicle through a dealership, the allure of convenience and bundled pricing can be strong; however, there are some important disadvantages for buyers that are worth highlighting.

High interest rates: Because dealers have less financing options available, finance deals offered through car dealerships may come with higher interest rates compared to what’s available in the wider market.

Limited loan options: When you finance through a dealer, you are limited to the financing options and lenders that are available to that dealer. You won’t have the freedom to shop around for better interest rates or loan terms.

Confusing T&Cs: Bundled pricing, car changeover costs, and confusing loan terms mean that buyers don’t always have the full picture when they take out a loan through a dealer.

Purchase pressure: One of the biggest gripes that customers report when financing through a dealer is feeling as though they are pressured to purchase add-ons or extended warranties which can add to the overall purchase price.

Reduced negotiation power: When you finance through a dealer, all of your cards are out on the table. For buyers, this means that you may have less negotiating power and dealers may use financing as a way to increase the overall cost of the car.

What Is a Car Loan?

A car loan is a loan that is used to fund the purchase of a new or used vehicle. According to the latest research from Finder, around 2.7-million Australians currently have a car loan, with some 90% of all new car sales arranged through finance.

The bank, lender, or financial institution will provide the borrower with funds that the borrower can then use to purchase a new or used vehicle. The borrower agrees to the repayment terms, interest, and fees of the lender and agrees to pay off the vehicle over a set period of time. Generally, car loans are secured loans – which means that the lender uses the car itself as security against the loan.

Aside from dealership car loans, buyers can also secure car loans through finance brokers or directly through lending institutions.

How Does a Car Loan Work?

If you don’t have the funds to purchase a car upfront, or your finances are managed in a way that means that it makes more sense to finance a car, then a car loan lets you borrow the money that you need upfront in return for paying off a loan to the lender. The amount of money that you borrow must be paid off in a certain period of time (referred to as a “loan term”) at regular intervals with interest.

In most cases, a car loan is brokered and secured against the vehicle (known as a secured loan). In the case of secured car loans, the car serves as collateral for the loan, which means that the lender has the power to repossess and take ownership of the vehicle if the borrower defaults on the loan or falls behind on payments.

While secured loans are the most common types of car loans there are several different types of loans which are available through different lenders, banks, and financial institutions including:

Secured car loan: as mentioned, this is the most common type of car loan and means that the loan is secured against the vehicle. Failure to meet your repayment obligations can lead to the car being repossessed by the lender.

Unsecured loans: unsecured loans are not backed by any collateral and are instead backed by the credit history of the borrower. A good credit score or loan history may mean that the borrower is eligible for a loan without needing to secure the loan against collateral.

Balloon payment car loan: This type of loan involves making smaller repayments over the course of the loan with a larger “balloon” payment made at the end of the loan term.  

Irrespective of the loan type, it’s important that buyers consider the terms, interest rate, and monthly repayments to properly understand their obligations for the loan that they choose.

Car Loan vs. Dealer Car Loan – Which Is the Right for You?

So, now that we know the advantages and disadvantages of applying for finance via car loans vs. dealer finance – which one should you choose?

The truth is, there is no ‘one size fits all’ answer to this question and it will come down to individual circumstances. Dealership finance can be a simple and straight forward way to manage all of your vehicle repayments through one, consolidated loan.

On the other hand, a car loan from a broker, financial institution, or bank can be a good choice if you have good credit. In most cases, loans offered through a broker or financial institution will offer more flexibility and better terms than dealership finance.

The choice between dealer finance and a car loan depends on interest rates, repayment terms, and overall cost. Whatever the case, it’s always best to weigh up your options, review the loan agreement, and understand the loan terms before making a decision on which one to apply for.