When financing your car, should you trust your lender or go for the broker?
There are a lot of options out there – going straight to our bank for a personal loan, a car loan lender, or opting for dealer finance. But what’s the best option that’ll save you money?
When most of us are in the market for a new car, we must take out a loan to finance it. Indicatively, 90 per cent of car sales are arranged through finance, according to the Financial Services Royal Commission.
It may be tempting to take the path of least resistance, but convenience, just like a cheeky cornetto at a 7-Eleven, could cost you more than if you hunted around for a better deal.
We’ve teamed up with Savvy, Australia’s leading vehicle finance institution to explain various car finance options to help you navigate the process.
A primer on comparison and comparison rates
Before looking at car finance, you need to know the difference between interest rates and comparison rates.
Some finance companies will advertise “interest rates” – these do not include fees and charges such as account keeping fees. When you see the term “comparison rate,” the rate does include most fees and charges, so you can get a clearer picture of how much the loan costs. It’s best to find a comparison rate for a loan so you can make an “apples-for-apples” assessment between two or more loans.
Dealer finance and the dreaded “0%” finance offer
Dealer finance does exactly what it says on the tin; finance that is provided by the dealership or the manufacturer. Most major car brands in Australia offer dealer finance, making the dealership a one stop shop for your car and your loan. The stats from the Royal Commission say 39 per cent of car buyers use dealer finance.
The drawback to dealer finance is that you can only finance new vehicles; their used or certified used car selection won’t be eligible. You also need near spotless credit to be considered, so if you have a few niggling credit cards or personal loans hanging over your head, it can prove difficult.
The other “too good to be true” aspect of dealer finance are “runout” deals with “0% finance” and “Zero per cent interest rates.” Just like other terms such as “dealer delivery,” the zero per cent can conceal more fees and higher purchase prices. Some of these loans come with caveats such as waiving your right to negotiate; offering finance only on selected models, which may be older stock; and having longer than normal loan terms. Many of these “0%” deals have bigger fees and charges than comparable car loans on the market. The longer the loan, the more fees the dealer can collect.
Some dealer loans may also have a balloon payment due at the end of the loan – which can range anywhere between 20-50 per cent of the purchase price.
Going through a bank or lender
The other 61 per cent of car finance comes from banks or lenders.
Finding finance through your bank is another easy option to finance a car. Many banks don’t offer what’s called secured car loans, which ties your car to the value of the loan as collateral. Unsecured personal loans are often more expensive than comparable secured car loans and require good credit as the bank is taking on more of a risk.
Going through a specialised car loan lender is also better if your credit isn’t the best, though you’ll have to spend a lot of time sifting through comparison rates and calculators to make sure you’re getting the best possible deal.
Finding a good car broker – worth their weight in gold?
A car loan broker helps find car loans that suit your situation as they can connect with multiple lenders through what’s known as a lending panel. The more lenders on their panel, the more competitive the loan tends to be. Savvy CEO and car broker Bill Tsouvalas explains:
“A car loan broker can find multiple loans that suit your situation and needs instead of offering one or two loan options like banks or lenders. Brokers can cater to bad credit customers and those in the market for luxury vehicles. They do the heavy lifting for you when it comes to researching loans and take care of your account throughout the length of your loan term.”
Great article! I think comparing the difference between lenders and brokers is very insightful as its a common misconception that they will do the same thing for you. I think that its really important people have all the information they need before taking out a car or home loan, and your article is a great starting point for those trying to take that first step.