When it comes to financing a vehicle, there are many options available, and spending some time researching the various terms, rates and types of vehicle loans available, will give you a sound base on which to make a final decision. As we’ll come to describe, dealer finance is not usually the best option.
Dealer Finance or Dealer Purchases
Dealer financing is a type of loan that is originated by a retailer, provided to its customers and then sold to a third-party financial institution. The financer purchases these loans at a discounted rate and then collects principal and interest payments from the borrower.
The dealership where you purchase your vehicle will usually offer dealership finance as an option. This is facilitated by the car dealership directly and is also termed as ‘in-house’ finance. Toyota will have Toyota Finance, Nissan will have Nissan Finance etc. In order to gain your business, they will usually offer extremely low-interest rates, and on certain makes and models, no interest at all. Due to the low-interest rates, you will be required to make a balloon payment at the end of the term which can be a substantial lump sum amount to settle. If you can’t afford to pay it out, the possibility exists to refinance the balloon, but this will add to the total cost of your loan.
There are several institutes that offer car finance as an option to dealer finance, such as credit unions, banks, building societies and leasing companies, so be sure to compare and research the best deals available.
How Does a Dealer Purchase Work?
Dealer purchase loans are typically require less paperwork than loans made available through us as a broker since the dealership facilitates everything for you. The dealer contacts their bank and negotiates all the terms and conditions on your behalf. The prerogative of the dealer is to sell you the vehicle and they generally make every effort to source finance approval for you even if you have a poor credit rating. This convenience will come at a cost and may not necessarily provide you with the most cost-effective outcome.
Unfortunately, the rate the dealership secures with the lender may not be the same rate they offer to you, so there is a certain lack of transparency in dealer finance, as well as s loss of control in choosing a lender as they will only offer you one option. Some dealerships may include commissions for the salesperson which invariably increases the rates offered.
If you’re considering auto finance, you should talk to us beforehand so you have a more affordable comparison.
Dealership Interest Rates and Fees
Dealership finance usually provides fixed interest rates, although some finance companies offer a variable rate bnut this is not common practice. Interest rates and fees will be subject to your specific application so do not hesitate to ask for clarification on these charges. You will have to pay some fees apart from your loan application such as:
- Service and Administration costs billed either monthly or as a once off payment
- Loan establishment fees
- Documentation and facilitation costs
So, what are the alternatives?
There are alternative options to dealer finance such as a car loan which is applied for separately to the purchase of the vehicle. This option affords you the freedom to source a few quotes from different financiers. In comparison to dealer purchases, this option will require more administrative time and effort but does have the advantage of higher bargaining power to negotiate better repayment terms and lower interest rates. Of course, everyone has their personal preference and individual circumstances to consider.
It is important that you fully understand all the terms and conditions of the type of loan for which you are considering, although we’d welcome the change to introduce you to far more affordable options.
What is the Qualifying Criteria?
In order to apply for a dealership loan, you will need to provide a few basic documents, and the requirements usually remain the same regardless of whether you apply online or in person.
Once you have provided information about the vehicle you would like to purchase the lender will assess the purchase price against your proof of income and ability to service this debt. Bank statements or payslips are generally sufficient proof of income, although some lenders will want to call your employer for verification. Under normal circumstances, the vehicle is considered as collateral to secure the loan but in some cases, you may need to cite additional collateral such as credit cards or mortgage loans which would help to secure the loan.
You will need Proof of insurance before you leave the dealership with your new vehicle – this can be arranged with the dealership> However, if you are able to do this at your leisure and search ahead of time it is possible to negotiate and secure the best value for money deal.
Lenders will want to know who they are lending to, so proof of identity is required. Credit institutes have created a subjective point system, and proof of identity requires 100 points of personal identification. You will need a photo ID with your signature on it and a current utility bill in your name corresponding with the photo ID details.
Bank statements for the past two months or utility bills will be necessary to verify proof of residence. Potential lenders need to know where notifications can be served if you default on repayments.
Should you be trading a vehicle in on a new car loan prepare the title and registration papers ahead of time to verify proof of ownership and any other documents to evaluate the vehicles worth as this will impact how much financing you receive.
How To Apply for Dealer Finance
The attraction of dealer finance is that it is quick, and provided you supply the correct documentation, it is usually a very simple application. Once you have completed the initial application documentation, and details of the vehicle you wish to purchase are final, the finance company will review and respond with conditional approval in as little as 1-2 days. You will then be asked to provide the supporting documentation such as proof of ID, income, residence and bank statements for verification.
A loan contract is then drawn up with details such as repayment terms, balloon payments if applicable, interest rate and the total amount you will repay over the full term. Once reviewed and signed the finance company pays the dealer and you collect your new vehicle.
Advice, Tips and Considerations
Wading through financial products and providers when purchasing a new vehicle can be overwhelming. Do not feel pressured to sign the first finance agreement you’re offered, as these loans will be part of your life for anywhere between 2-5 years, and you really want to secure the best finance terms for that period.
Remember to check the duration of the interest rate you are offered. While you may be presented a low interest rate,, this may only be valid for the first year and may affect the repayments once that period has expired.
If you have a trade-in, consider the actual value of the car you are trading in. Often the capital raised from a private sale outweighs settling for less on the trade in, in lei of a lower interest rate.
Do not be fooled when you see ‘no down payment’ as almost all loans of this type will require you to provide some sort of security, and the lack of down payment will be compensated by an inflated monthly payment term. The more substantial your deposit the more favourable interest rates and lower monthly repayments will be.
Understand what you can afford and have realistic expectations before you start looking for a vehicle or discussing finance. It’s very easy to walk out of a dealership having made an emotional commitment rather than a sound financial one.
Dealer Finance FAQs
Common frequently asked questions. Of course, you are welcome to contact us any time on 02 9707 7888.
Is it possible to settle my car loan early?
This will depend on the finance contract negotiated with the dealer (and lender). Many vehicle loans are secured with a fixed interest rate, and the lenders will place restrictions on whether you can repay the principal loan early. Early settlement is often accompanied by a penalty payment. Ask how your dealer calculates the interest. If it will be anything other than simple interest or compound interest it’s best to look for a second opinion.
Is there any additional cost involved when buying from a dealer?
Yes, there are additional costs to consider such as mandatory insurance premiums and registration fees to facilitate the transfer of ownership. Stamp duties are levied by the Australian government which are once off taxes payable on transfer of ownership and the amount is calculated on the purchase value of the vehicle.
If I decide on dealership finance, are there specific questions I should ask?
You should never feel intimidated to question all aspects of your loan. Be specific with asking about inclusions and ad on products such as warranty costs, servicing plans and additional insurance coverage that may be included in the loan agreement.
My circumstances have changed, can I alter my repayment amount?
When you secured the original loan, a minimum amount was agreed upon, and provided the repayment is not less than the original amount, it can be amended. The billing cycle can also be changed from a weekly to fortnightly or monthly debit.
Can I sell my car while under finance?
Any dealership will hold security over the vehicle until paid for in full. You are therefore obligated to repay your loan upon the sale of the vehicle. You can ask for details on how to make the final settlement payment from your financer.