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Car Loans
Dealer finance vs car loan: what’s the difference?
When considering how to finance a car purchase, it’s important to understand the differences between dealer finance and traditional car loans, weigh their pros and cons, compare rates and fees, and assess which option best suits your needs.
So, you’ve researched and compared different cars, decided between petrol, diesel, hybrid and electric, conducted a number of test drives, and settled on the vehicle that best suits you. It's time to let the dealer know you’re ready to drive out of the showroom - but how are you going to pay for your new set of wheels?
If you’ve chosen to buy, rather than lease, a dealership may offer to arrange finance for you, rather than you organising a loan directly through a bank or other lender, such as RACV Finance. Both options can work, depending on the offer and your personal circumstances, which is why understanding the differences is important.
This article explains how dealer finance compares with a traditional car loan, and what to consider when weighing up your options.
More: Research and compare different cars on sale in Australia
What is dealer finance
Dealer finance is similar to a conventional car loan, with the key difference being how it’s arranged. Rather than organising finance directly with a lender yourself, the dealership arranges the loan as part of the purchase process.
Dealers may work with third party lenders, or with a finance arm linked to the vehicle manufacturer. This allows the loan and the vehicle purchase to be organised together.
Pros and cons of dealer finance
Pros
- Convenience: Dealer finance can be arranged in the showroom and bundled with the car purchase, making the buying process simpler and faster.
- Promotional offers: Dealers may offer incentives such as low interest rates, introductory offers or low‑deposit options on certain models.
Cons
- Less room to negotiate: Because finance and the vehicle purchase are often packaged together, there may be less flexibility to negotiate the car’s price separately.
- Costs can be offset elsewhere: Some incentives may be balanced out through a higher vehicle price, fees, or charges over the life of the loan, which can make comparisons more difficult.
For a clearer comparison, it can help to look beyond the headline rate and repayment amount and check whether the offer includes features like a balloon payment or other terms that affect the total cost.
“In many cases, dealer finance offers are based on the car’s list price, which means that’s the price you end up paying,” says Carlos Gasser, General Manager of RACV Finance. “By taking up these offers, buyers may be giving up some ability to negotiate on the vehicle price. What can happen behind the scenes is that any benefit in the finance is recovered elsewhere in the transaction, rather than through the loan itself.”
Balloon payments and comparison rates
Dealer finance arrangements may sometimes include a balloon payment at the end of the loan term. This structure can reduce regular repayments during the life of the loan, because a portion of the principal is deferred to the final payment. While this can make repayments appear more manageable in the short term, it’s important to consider the total amount repayable (including the balloon amount) when assessing affordability.
In some cases, a comparison rate may not be available or may not fully reflect the structure of the loan, which can make it harder to compare with standard car loans. Reviewing the full loan terms (including any final payment obligations) can help give you a clearer picture of the total cost.
There may be less flexibility on price if you finance the car through a car dealer . Image: Getty
How a traditional car loan works
With a traditional car loan, you arrange finance directly with a lender and agree upfront on the loan amount, term and interest rate. This means you can see how much you’ll repay over time before you commit.
Applications are often completed online, allowing you to organise finance outside of the dealership environment. While this means taking an extra step before purchasing the car, it can also provide more time to compare lenders and loan features.
Some lenders may include additional features with a car loan, such as complimentary emergency roadside assistance for a limited period or member-based discounts. Availability and eligibility vary by lender and loan.
An independent lender is generally focused on the terms of the loan itself, rather than the vehicle purchase. Regardless of how a loan is arranged, lenders are required to assess whether a loan is suitable and serviceable, including whether the borrower can reasonably manage the repayments.
Comparing rates and fees
This is where the difference between dealer finance and a traditional car loan can become more apparent, so it’s important to look beyond the headline rate and compare the total cost of each option.
One useful tool is the comparison rate, which is designed to give a more realistic picture of the cost of a loan by incorporating the interest rate and most fees and charges. This can make it easier to compare loans on a like‑for‑like basis.
However, comparison rates don’t capture every possible cost. Things like optional extras, insurance products, or early repayment fees may sit outside the comparison rate, which is why it’s still important to read the fine print and understand what’s included – and what isn’t – before committing.
As Carlos Gasser explains, negotiating the price of the car separately from the finance can also help improve transparency, allowing you to more clearly compare a dealer finance offer with a loan from a bank or other lender.
More: Compare up to 3 cars and see the specs, features, ratings and running costs side-by-side.
Which option suits you best?
Dealer finance can be competitive, particularly when manufacturers or dealers are offering incentives to support vehicle sales. A traditional car loan, while requiring more upfront organisation, may offer clearer separation between the cost of the vehicle and the cost of finance.
Neither option is inherently better or worse. Each should be assessed on its own merits, taking into account the total cost, the loan terms, and how well the option suits your budget and circumstances. Comparing offers and understanding how they’re structured can help you make a more informed decision.
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R.A.C.V. Finance Limited ABN 82 004 292 291 Australian Credit Licence No. 391488. RACV Finance is subject to RACV lending criteria. Conditions, fees and charges apply.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. You should always seek your own professional advice that takes into account your own personal circumstances before making financial decisions.
