Quick answer
Dealer finance is arranged through the car yard at the time of sale; a car loan you arrange yourself is sorted before you shop. Either can be good value. The fair way to compare is the total amount payable, including fees and any balloon, for the same loan amount and term, with no add-on insurance bundled in. Know your comfortable repayment before you sit down.
Key points
- Look at loans before you visit the dealer so you have a benchmark.
- Compare total amount payable for the same amount and term.
- Add-ons such as loan protection, gap cover and tyre and rim cover are often not good value.
- A four-day pause applies before many add-on insurance products can be sold.
You’ve found the car, the salesperson is friendly, and there’s a finance manager down the corridor who can have everything signed today. It’s convenient, and sometimes it’s a good deal. But convenience and value aren’t the same thing, and the finance office is where many car buyers lose track of the numbers.
What is dealer finance, exactly?
Dealer finance is a loan arranged through the car yard as part of the sale. The dealer usually isn’t the lender. It works with one or more finance companies and may be paid a commission for arranging the loan. Moneysmart notes dealerships usually offer fixed-rate loans, and that they may also offer add-on products alongside the loan.
A car loan you arrange yourself works the same way underneath: a lender pays for the car and, for a secured loan, holds the car as security. The difference is timing and leverage. When you arrange finance before you shop, you walk in knowing what’s possible.
Why does knowing your number first matter so much?
The finance conversation in a showroom tends to start with “what weekly repayment are you comfortable with?” Once you name a figure, the deal can be built backwards to hit it: a longer term, a balloon at the end, or a bigger loan with extras folded in. The repayment matches, but the total cost can climb.
The fix is simple. Before you go, use the car budget planner to find your comfortable repayment and note the total you’d be borrowing. Then, in the showroom, ask about the total amount payable, not the weekly figure.
How do you compare two offers fairly?
Line the offers up side by side for the same loan amount and the same term:
| Question | Dealer offer | Other offer |
|---|---|---|
| Amount financed (excluding any add-ons) | ||
| Term | ||
| Regular repayment | ||
| Balloon or residual at the end | ||
| Establishment and monthly fees | ||
| Early payout fee | ||
| Total amount payable |
Moneysmart suggests using the comparison rate, which combines the interest rate with most fees, and only comparing it across loans of the same amount and term. The total amount payable is the plainest measure of all. If one offer has a balloon and the other doesn’t, the comparison isn’t fair until you add the balloon to the total.
If you’d like a second option to test against, you can see your options before you commit and take that comparison into the dealership.
Which add-ons should you question?
Car yards often offer extra insurance products with the loan. Moneysmart names loan protection, gap cover and tyre and rim protection and says they “are not good value for money” for many buyers. They also add to the amount you borrow if they’re financed, which means you pay interest on them.
Since 5 October 2021, ASIC’s deferred sales model has required a four-day pause between the sale of a main product (such as the car) and the sale of many add-on insurance products. Some classes are exempt, but the general idea is to stop high-pressure bundling. Use the pause: if you genuinely want a product, compare it with what’s available elsewhere.
Is it smart to split the car deal from the finance deal?
Yes. Negotiate the drive-away price of the car first, in writing. Only then talk about how you’ll pay. If the two are negotiated together, a discount on the car can be offset by a pricier loan without you noticing. Keeping them separate also makes it easier to walk away from the finance and keep the car deal if you’ve found better finance elsewhere.
A few more tips:
- Read the contract before you sign, including the fees schedule.
- Don’t sign anything with blanks.
- Ask whether extra repayments and early payout are allowed without fees.
- Take the paperwork home if you need time. A good deal will still be there tomorrow.
When might dealer finance be the better choice?
Sometimes a manufacturer subsidises finance on a model it wants to move, and the total cost is genuinely low. Sometimes the convenience of one transaction matters to you. That’s fine, as long as you’ve checked the total cost against an alternative and the repayment fits your budget. For more on buying new, see new car loans. If you’re buying second-hand from a yard, used car loans covers the extra checks.
What questions should you ask in the finance office?
Take this list with you, and write the answers down:
- What is the total amount payable over the full term, including all fees?
- Is there a balloon or residual payment at the end? How much?
- What fees apply at the start, each month and if I pay the loan off early?
- Can I make extra repayments without a fee?
- Is any insurance or other product included in the amount financed? Can I remove it?
- Is this rate fixed for the whole term?
If you can’t get a clear answer to any of these, that’s an answer in itself.
Walk into the showroom with options
The strongest position in any car negotiation is knowing your budget and having a second offer in your pocket. Start an application with our secure partner and you can see your options before you commit to anything. A real person can help you read a dealer quote against yours. Please answer the questions accurately, so the comparison you take into the showroom is a real one.
Frequently asked questions
Is dealer finance always more expensive?
Not always. Manufacturers sometimes run promotional finance on particular models. The point is to compare the total cost against another option, rather than assume either way.
Do I have to buy add-on insurance to get dealer finance?
No. Moneysmart says add-ons like loan protection, gap cover and tyre and rim insurance are often not good value. You can decline them and still get the loan.
What is the deferred sales model for add-on insurance?
Since 5 October 2021, ASIC's deferred sales model has required a four-day pause between the sale of a main product, such as a car, and the sale of many add-on insurance products, giving buyers time to think.
Can I negotiate the car price and the finance separately?
Yes, and it's a good idea. Agree on the drive-away price first, then discuss finance. That way a discount on one can't be quietly clawed back through the other.
Should I tell the dealer I have my own finance?
You can. Having another option in hand lets you ask the dealer to beat it on total cost. Just make sure you're comparing like with like.