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Dealer finance vs lender car finance

Find out which better suits your needs and compare your options now.

Both dealer finance and car loans are popular options that can get you the funds you need. We look at the differences so you can decide which one may be right for you.

How does financing a car work?

In simple terms, financing refers to the funds you secure in order to buy a vehicle. You have a number of car finance options, such as using existing savings, applying for a car loan or applying for dealer finance through a car dealership.

Once you have secured finance, you will use the money to cover the purchase price of your new car. If you’re getting a car on finance, you’ll then need to repay the amount you borrowed according to the terms you agreed to with the lender.

Dealership finance and car loans – pros and cons

Dealership finance refers to the finance options offered by a car dealership, such as Toyota Finance or Nissan Finance, which secures the funds through a lender. Dealer finance may offer lower rates than car loans, but these rates may only be available on specific makes and models.

If you choose to get dealer finance, your car payment plan will be similar to a normal car loan, and require you to make regular repayments over a set period to cover the cost of the vehicle. Unlike most car loans, many dealer finance options give you the ability to lower your regular repayments by making a lump sum balloon payment at the end of the loan term.

With a car loan, you receive a lump sum payment directly from a lender to purchase your vehicle. You can use your vehicle as security against the loan, so you can get more competitive rates than unsecured loans, often between 6-10% p.a. However, if you default on your loan, you can lose your vehicle. Car loan terms are usually for between one and seven years.

Dealer financeCar loan
Interest rates
  • May offer lower interest rates than car loans
  • Low interest rates may only be available for specific makes and models
  • Commission for the car salesman may push rates up
  • 0% rate deals may indicate a higher purchase price for the car
  • Lenders offer various rates, which means you can choose the most competitive
  • Using your car as security lets you take advantage of lower rates
Loan term
  • Typically three- to four-year terms
  • A balloon payment is usually payable at the end of the term
  • Early repayment costs may apply
  • Choose rates between one and seven years
  • Early repayment costs differ between lenders
  • The dealer finance rep handles the paperwork
  • No need to shop around for better offers
  • Balloon payment can help lower your regular repayments
  • Gives you leverage to negotiate the sale price
  • A range of competitive car loans are available
  • Your repayments will see your car loan repaid in full at the end of the term
  • You can choose your lender and your loan
  • Loans are available for new, used and classic cars
  • You need good credit to be eligible
  • It’s usually only available to new vehicles
  • Balloon payments can be large and it can be difficult to save that money while repaying a loan
  • Higher interest rates may apply to certain types of loans
  • Upfront and ongoing fees may apply
SuitabilityBorrowers that want to buy a new car and have a deposit saved.Borrowers that want to shop around and have the option of buying from a dealer or a private seller.

Be wary of dealers

Dealers earn a commission when you take out a car finance with them. They also earn a commission when selling you add-ons, such as mechanical breakdown insurance. Always read the fine print so you know exactly what is involved in the policy. Does the insurance cover pre-existing faults? What about claim caps, exclusions and excess amounts? If there’s a lengthy list of things the company won’t cover, this type of insurance usually isn’t worth it.

Dealer financing & car loan side by side

How much can they save?

Two neighbours, Mark and Steve, are both in need of a new car. After researching their options and choosing what kind of car they want to get, Mark opts for a car loan while Steve takes on financing option from the dealership where he made his purchase.

The two cars they purchased ended up being the same price – $20,000 – so who chose the better financing option?

Mark takes out a car loan at a 7.00% p.a. rate for a five-year period. Using a car loan calculator, he sees that he will pay $396 in monthly repayments, and will pay a total of $3,761 in interest over the course of the loan term.

Steve, who takes on dealer finance at the same rate, sees that he’ll have monthly repayments of $297 over the term of his loan. He’ll be borrowing the same amount of money, but his residual balloon payment of $5,000 means he’ll only be charged interest on $15,000, resulting in lower ongoing repayments.

The results

Mark continues to pay $396 every month and at the end of the five years pays his car out in full. His repayments total $23,761 for his original $20,000 vehicle purchase. Steve makes lower ongoing repayments of $283, but when it comes to the end of his five-year loan term he’s responsible for paying $5,000.

This means he will need to ensure he has this amount saved by the end of his loan term, requiring him to put away $83.33 a month to have the amount saved. All up, with the amount he’d need to save per month and his repayments, he’d be contributing $380.33 per month to his loan (directly or indirectly). Compared to his neighbour, he’d be saving $940 over the loan term.

What else they need to consider

While one financing option saves you more in ongoing repayments, it’s not only the interest and savings that you should consider when weighing up your options. Mark and Steve should also look at the features offered to them by their lenders.

For instance, how much is the establishment fee, and are they able to pay out the loan early or make extra repayments? Do they have special benefits like discounted insurance? Mark and Steve both need to look at their financing options as an entire package before signing on the dotted line.

What is a balloon payment?

As mentioned above, one of the key differences between car loans and dealer finance is the ability to use a balloon payment. Depending on your financial situation and preferences, opting for a balloon payment may be helpful in managing how you repay your loan.

Adding a balloon payment will reduce the size of your regular repayments, but require you to make a larger lump-sum payment at the end of the loan term. You will not be charged interest on this amount, but will need to factor it into your budget when considering which financing option to use.

If you can’t afford to pay this amount at the end of the loan, you may also choose to refinance it – this is how many dealership finance companies make their money. If you do decide to opt for dealership finance, calculate how much you will need to put away each month to have your balloon payment saved at the end of the loan term and then make sure you save it. This way, you will have your finance paid off and won’t have to enter into another refinancing contract.

Bottom line

Convenience always comes with a price, and that extends to dealer-financed car loans. Before settling for what they are offering, you should compare what outside banks and non-bank lenders are offering. In many cases, the terms offered here will far outweigh the low interest rates the dealer is offering.

Always compare the rates and terms offered by a variety of different lenders before committing to anyone. There are numerous tools available to help you with this, such as comparison charts and calculators. As with any loan product, if you want to buy a car on finance, you should make sure that it is within your budget and that you will be able to meet your repayments.

Frequently asked questions

Want to buy a car? Compare loans here

Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Establishment Fee
Simplify Secured Car Loan
6.25% - 12.50%
12 - 60 months
$100 - $500
Eligibility: Must be 18+, a New Zealand resident or permanent citizen and have an income of at least $500 per month.
See how much you could borrow without affecting your credit score.
MTF Finance Secured Car Loan
9.70% - 21.70%
3 to 60 months
Eligibility: Must be 18+, be an NZ citizen, resident or have a work visa, and have a regular source of income.
Secured car loans from $2,000.
FROM 6.99%
The Co-operative Bank Unsecured Personal Loan
6.99% - 19.99%
6 months to 5 years
Eligibility: Be 18+, an NZ citizen/permanent resident, or have a valid work visa.
Floating-rate, unsecured personal loans from $3,000.
Lending Crowd Secured Car Loan
6.45% - 17.23%
3 or 5 years
$350 - $650 depending on the amount borrowed
Eligibility: Be a NZ resident/citizen and have a good credit score.
Borrow $5,050 to $200,000 for your chosen vehicle. 100% online with no paperwork or early repayment fees.
Nectar Unsecured Car Loan
8.95% - 29.95%
6 months - 4 years
Eligibility: Must be 18+, an NZ citizen or permanent resident, have an income of $400 per week or more (after tax) and a stable credit history.
Unsecured car loans from $1,000 with payouts made within one day of approval. Applications entirely online.
CarFinance2U Car Loan
8.95% - 23.95%
1 - 5 years
Eligibility: Be at least 21 years old, have a valid NZ driver's licence and be an NZ citizen or permanent resident.
With a CarFinance2U secured or unsecured car loan you could get pre-approval for your next car in 30 minutes.

Compare up to 4 providers

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