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Should you purchase your car with bank loan or dealer finance?

Should you purchase your car with bank loan or dealer finance?

If you’ve found the car of your dreams, finding an affordable way to pay for it may be the final hurdle. Both car loans and dealership finance are popular ways to pay for cars if you don’t have the cash upfront, but each has its pros and cons.

The key differences between dealer car finance vs. a bank loan are:

  • Car loans are available directly from lenders, while dealer finance is arranged by the dealership that sells cars.
  • When you apply for a bank loan, you’ll need to prepare the documentation yourself. The dealer typically takes care of all the paperwork when you opt for dealership finance.
  • Interest rates and fees can vary significantly, so it’s always worth comparing the two options.

The advantages: bank car loan vs. dealer financing

Pros of bank car loans

  • Car loans give you more control as you’re directly working with the lender to source the best deal.
  • Vehicle finance from banks may give you more flexibility, and you can prepay a part of the loan or the entire amount before the end of the loan duration.
  • Generally, you’ll get a lower interest rate if you choose a bank loan over dealership finance.

The main drawback of a bank car loan is that you’re in charge of completing the formalities and doing the paperwork, which can be time-consuming.

Pros of dealership finance

  • The dealer may complete all the paperwork and also structure the loan based on your financial situation.
  • If you have a low credit score, qualifying for a regular car loan may be difficult, but dealer finance may be more likely to offer you loan approval.

One major disadvantage of dealer finance is that you don’t have as much control over the negotiation process and may have to accept the deal you’re offered.

What to consider when choosing between dealer finance and a. bank loan

  • Compare interest rates

Although dealers may advertise lower rates of interest, ensure you’re making the right comparison. Check the total costs, including establishment charges and maintenance fees for both options.

  • Know your budget

You may be tempted to borrow more to purchase a dream car; however, knowing exactly how much you can afford in repayments will ensure you don’t risk overspending. Use RateCity’s Borrowing Power Calculator for more information on how much you could afford to borrow.

  • Know what you’re paying over the course of the loan

Before you make your decision, understand exactly how much you’re paying and for what. Check all costs, including break costs, applicable if you repay the loan before the end of the loan term. Many banks give you all the costs upfront, which ensure you know exactly what you’re going to be paying for.

  • Determine if a balloon payment is required

A balloon payment is a lump sum amount that you sometimes have to pay the lender when the loan duration ends. A balloon payment can lower your regular instalment amount but can become a financial burden at the end of the loan term.

When you’re buying a car, how you finance the purchase is an important consideration. Take your time to research interest rates and special offers to know how much the vehicle will cost you in the long term.

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

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