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Should I get a car loan through a dealer?

Should I get a car loan through a dealer?

As with most things in life, getting a car loan through a dealer has both pros and cons.

The big advantage of getting a car loan through a dealer is that it’s quick and convenient.

You don’t have to go to the trouble of visiting a lender or finding a broker; you can just get it done then and there through the dealer.

Another advantage of getting a car loan through a dealer is that it might come with a sweetener, such as 0 per cent interest for the first few months or lower rates for the life of the loan.

However, please note that these sweeteners usually have a catch.

If you pay 0 per cent interest for the first few months, you’ll probably be charged a higher-than-usual interest rate once your repayments start.

If you have a lower interest rate for the life of the loan, you’ll probably have to make a one-off ‘balloon payment’ at the end of the loan, which will ultimately result in a greater total cost over the life of the loan than if you opted for higher monthly repayments without a balloon payment.

The cons of getting a car loan through a dealer

One obvious disadvantage of getting a car loan through a dealer is that the interest rate will often be higher than an equivalent car loan sourced through a bank.

Why? It’s because the dealer is a business on-selling a product – in this case, a car loan that is actually being provided by a bank. Like any business that on-sells a product, the dealer will add a margin (or extra cost) to profit from the transaction. The extra cost you pay is the dealer’s profit. If the dealer wasn’t earning this profit, it would have no incentive to offer you the product.

So you can’t expect dealers to offer you the cheapest car loans.

Another potential negative of getting a car loan through a dealer is that your options will almost certainly be limited. The dealer will probably have a partnership with just one lender – and the dealer will probably use this lender not because it’s in your best interests (e.g. lower interest rates or lower fees) but because it’s in the dealer’s best interests (e.g. higher commissions).

Again, this is another reason why you can’t expect to get the cheapest car loans from dealers.

A final con of dealer finance is that customers can feel under pressure to sign on the dotted line then and there. With car loans and other types of loans, it’s generally best to spend time calmly researching your options before you agree to anything.

So, should I get a car loan through a dealer?

There’s no right or wrong answer to the question of whether you should get a car loan through a dealer.

The important thing is that you take the time to weigh up the pros and cons of dealer finance.

If you think the speed and convenience of dealer finance outweighs the higher interest rates you’ll probably have to pay, then getting a car loan through a dealer might be suitable for you.

However, if you believe that getting the best car loan for your unique circumstances is more important than speed and convenience, then dealer finance might not be suitable for you.

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Fact Checked -

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.



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Learn more about car loans

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.