Bank Car Loan vs Dealer Financing

If you’re buying a new or used car and you need to borrow money to do it, two common options are a bank car loan and dealer financing.
Read on to find out everything you need to know about both options, including their pros and cons.
Knowledge is power when it comes to borrowing money to buy a car!


How car finance works

Car finance involves you borrowing money from a lender. This allows you to get the car you want now, as long as you can afford to make regular repayments.

After all, not many of us have a spare 20 or 30 grand (or more) to throw at a new set of wheels!


How to finance a car

You can borrow all or some of a car’s total price, depending on the policy of the lender. Some lenders will provide no deposit car loans to car buyers, others will require you to have a deposit.  A 20% deposit is common.

The amount you borrow will need to be repaid over an agreed time period, usually by monthly repayments. Standard car loan terms are between 1 and 7 years in Australia, 5 years is the most common loan term. Lenders charge interest on the amount you borrow until the loan is fully repaid.

We’ll now look at your some car finance options (bank car loans and dealer financing) in more detail. Let’s start with bank car loans.


Bank Car Loans

There are two ways to get bank car loan:

1) approach a bank directly yourself.

2) approach a car broker for advice. We’ll talk more about that a little later.


First, let’s look at the pros and cons of bank car loans.



  • Interest rates on bank car loans are often lower than dealer finance.

  • That’s because dealers usually add a big mark-up for arranging finance. Lower interest rates mean lower repayments. It also means you’ll pay less for the car overall.

    • More choices.

    • When you choose dealer finance, you’ll be dealing with the lender that a dealer has a relationship with.

      On the other hand, when you deal with banks via a broker, you have the option of dealing with multiple banks and picking the one that’s right for you. Of course, it’s time consuming to do that yourself, but if you use the services of a broker, they can do all that leg work for you.

      • You have more negotiating power with lenders.

      • Car lenders compete aggressively for business. You can potentially take advantage of that by trying to negotiate a better loan deal. Better yet, get a broker to do it for you. They negotiate with lenders for a living. They understand all the jargon, terms and conditions.

        • You have more negotiating power with dealers.

        • If you walk into a car yard with your finance pre-approved, you have more negotiating power with dealers. You’re like a cashed-up buyer and you can use that power to your advantage. You can ask for a better deal on the car’s price and if the dealer won’t give it to you, you can take your business elsewhere.

          • Bank loans can usually be taken out for both new and used cars.

          • Dealer finance on the other hand is usually only available for new cars, so it limits your options.

            • Bank loans can be used for private sales.

            • Dealer finance on the other hand can obviously only be used for car yard sales. You can often get a better price on a car by buying privately and cutting out the dealer.



              • The time and hassle if you decide to arrange a bank loan yourself rather than going through a broker.

              • You’ll have to research all your options, and it can be difficult to understand the banks’ interest rate cards and approval policies because these are not published publicly.  That means you may be wasting time and harming your credit file by applying to a lender who was never going to approve you, or who was always going to charge you a high interest rate. To avoid that, using the services of a broker is a no-brainer!

                • You have to pay interest.

                • But you usually have to pay more with dealer-arranged finance. The only way to avoid paying interest on a car is to pay cash.

                  That’s not an option for many of us unless you want to buy a cheap second-hand car.

                  • Approval can take a little longer.

                  • That’s another reason why you should arrange a finance pre-approval before you buy. You’ll know how much you can spend before you set foot in a car yard.

                    Dealer Financing

                    Dealer financing involves the dealer arranging your finance for you. They will have a relationship with a lender to enable them to offer this service.

                    Let’s look at what’s involved.

                    Financing a car through a dealership

                    Like bank loans, financing a car through a dealership has pros and cons.
                    But unlike bank car loans, the cons certainly outweigh the pros.



                    • Undoubtedly, it’s convenient.

                    • There is less time and hassle involved compared to arranging a bank loan yourself (but not if you use the services of a car finance broker).  Dealers will handle the paperwork for you (but a car broker will too).



                      • You will often pay a higher interest rate.

                      • You have to pay interest with dealer finance, like you do with bank loans. But The convenience of dealer-arranged finance comes at a cost.

                        Interest rates will often be higher than you can get with a bank loan. Dealer finance works on the theory that you want to get your finance sorted then and there.

                        That’s why dealers will sit you down in their plush offices to get you to sign finance that they arrange. That finance deal will be in their best interests, not yours. Dealer finance is designed to close sales for the dealer.

                        • You are restricted to one, maybe two, lenders

                        • Most car dealers only have one lender they can offer (usually the same lender that lends them money to fund their ‘floorplan’ stock).  In a market of countless lenders, if you limit yourself to one you’re unlikely to get the best deal on the market.

                          • The cost of dealer finance might be factored into the price of your car.

                          • Car dealers have a sleazy reputation for a reason. Some will give with one hand and take away with the other. If they can offer you a finance deal that’s comparable to what you could get with a bank loan, check the price of the car you’re buying. You might find that it’s dearer than what you should be paying. Either that or you’ll be required to make a balloon payment (see below).

                            • Low-interest dealer finance often comes with hidden costs and risks.

                            • If a dealer A balloon payment is a larger repayment amount at the end of the loan term. This makes the repayments during the loan term lower. However, while that can be a good thing, it also means you’ll have to budget for the higher balloon payment at the end of your term because it may be higher than any lender will be willing to finance.   Hefty establishment fees, monthly account fees, and early termination fees may also apply.

                              • No choice.

                              • You’ll get your finance through the dealer’s finance provider. This removes your negotiating power to choose.

                                • No negotiating power.

                                • When you walk into a car yard and the dealer knows you need finance, you lose your negotiating power over the car’s price compared to walking in with a pre-approved loan (and cash).

                                  You also can’t play one lender off against another like you can with bank loans. You’re limited to what the dealer’s finance provider is prepared to offer.

                                  • Dealer finance can’t be used for private sales.

                                  • Bank loans can.


                                    Low interest car loans from dealers

                                    Beware of low interest car loans from dealers. As mentioned in the cons section above, there’s usually a sting in the tail of these deals.  
                                    Either a higher priced car to compensate the dealer, a balloon payment, or both.


                                    How to get a car on finance

                                    If you decide to get a bank loan:

                                    • make sure you (or your broker) shops around to try and find a good deal among the huge range of lenders out there in the Australian market.

                                    • avoid making an application with multiple lenders as this can damage your credit score.

                                    If you opt for dealer finance:
                                  • don’t be pressured into signing the deal quickly just to get out of the dealer’s office. Make sure you understand all of the terms and conditions of your finance, as well as the total cost, and NEVER sign up to finance on the spot.

                                  • consider how you will afford your balloon payment (if one is included).

                                  • make sure the price of your car is fair.

                                  • use the comparison rate to compare the dealer finance against what you could get with a bank loan. The comparison rate includes the cost of any lender fees and charges, as well as interest.

                                  What do you need to finance a car?

                                  To get a car on finance, you ‘ll usually need the following:

                                  • ID

                                  • proof of employment/income to show you can afford your repayments.

                                  • Lenders will usually conduct a credit check on you to find out your credit score. If you have a good credit score, it’s more likely your finance will be approved. If it is approved, you’ll usually have to take out appropriate insurance.

                                    The lender will also register their interest in your vehicle under the Personal Properties Securities Register, unless you opt for unsecured finance with a higher interest rate.


                                    The best way to finance a car in Australia

                                    The best way to finance a car in Australia is to get expert help from a car finance broker. Brokers work for car buyers, not for lenders. They understand all the finance options available and they can save you time, money and hassle trying to find a good deal.


                                    How we can help

                                    If you’re looking to buy a new or used car and you need finance, talk to our expert brokers at Auto Car Loans.  We’ll take the time to understand your situation before finding you a great deal.

                                    We arrange vehicle finance for a living a can help you compare your options from a panel of over 50 lenders. Get in touch with one of our experienced finance brokers today by calling 1300 301 051 during business hours.

                                    DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.