Car loan or dealer finance?

Most dealerships do not lend their own money. They act as an intermediary for a finance company, and they earn from arranging the loan. That earning can come from a commission or fee paid by the lender, from fees added to the loan, or from add-on products sold alongside the finance.

This is a legitimate business model. It simply means the finance quote is a commercial offer being made by someone with an interest in the outcome, in the same way the car price is. It is not a neutral service provided for your convenience, even though it is presented that way at the point where you are tired and want to go home.

Australian regulation has tightened here. Flex commissions, which let dealers set your interest rate and take a cut of the increase, were banned by ASIC from November 2018, and responsible lending obligations apply to dealer-arranged finance as they do to any consumer credit. But dealers still earn from arranging finance, and the rate you are quoted is still frequently above what the same lender would offer you directly or what a competitor would offer.

Zero percent and very low rate offers are real. But the money to fund them has to come from somewhere, and it comes from the price of the car.

A manufacturer offering 0% finance is subsidising the loan as a marketing cost, usually on specific models it wants to move. In exchange, the price is typically firm: you will not also get the discount a cash buyer could negotiate, and the offer is often restricted to particular stock, a short term, or a large deposit.

So the test is not the rate, it is the total: the price without the dealer’s finance plus the total cost of a separate loan, against the dealer’s price plus their finance. Dealers are often reluctant to quote the first figure directly.

The term and the conditions on these offers matter too. A 0% rate over 36 months with a 30% deposit is a very different proposition from a 0% rate over 60 months, and some offers revert to a high rate after a promotional period rather than running at 0% for the whole term.

Two rows deserve expanding. The first is vehicle age. Most lenders reserve their lower secured rates for newer cars and set a maximum vehicle age at the end of the loan term, because an older car is weaker security. The limit varies widely between lenders. A buyer of a ten-year-old vehicle may only qualify for an unsecured rate even though the loan is for a car.

The second is repossession. Both a car loan and dealer finance are typically secured against the vehicle, and that security is what buys the lower rate. It also means that if you default the lender can repossess and sell the car, and you remain liable for any shortfall between the sale price and what you owe. An unsecured personal loan costs more precisely because it does not carry that consequence.

Every one of these is visible in the contract:

• A balloon payment. A large lump sum deferred to the end of the term keeps monthly repayments low, but interest accrues on the deferred amount throughout, so the loan costs more overall. You can also finish owing a lump sum on a car now worth less than that amount. Our Car Loan Repayment Calculator shows a quote with and without the balloon, and what the balloon adds.
• Add-on products. Extended warranties, paint protection and add-on insurance such as gap or tyre cover are often rolled into the loan, so interest is paid on them for the whole term. Each has its own price, separate from the loan.
• Early repayment fees. Common on fixed-rate car loans. For a loan paid out early, this can outweigh a slightly better rate.
• The comparison rate. An establishment fee plus monthly account fees on a five-year loan moves the real cost meaningfully above the advertised rate, which the comparison rate captures.
• Term length. A seven-year loan on a car that will be worth little by year five means spending years owing more than the vehicle is worth. The longer the term runs past the time the car is kept, the larger that gap.
• Whether the trade-in has been used to hide the finance cost. A generous trade-in figure paired with an expensive loan is a common structure, and an independent valuation shows whether the figure is real.

Sequencing changes most of this. A buyer who arrives with pre-approval for a car loan knows the rate they actually qualify for and has a firm budget. Pre-approval costs nothing beyond an application, which is recorded on the credit file. The car price is then negotiated as a cash buyer, because from the dealer’s perspective that is what the buyer is, and the dealer’s finance can be compared against the approval once the price is agreed in writing.

This sequence also separates the three negotiations that dealerships prefer to bundle: the price of the car, the value of your trade-in and the cost of the finance. Bundled together, a concession in one can be quietly recovered in another, and the single monthly repayment figure a salesperson steers towards conceals all three. Separate numbers are the only way to compare like with like.