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.
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
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
Borrowers 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.
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.
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
Not necessarily. While a lot of dealerships will offer some form of dealer finance, this will not be the case for all of them. You should always talk to the dealer directly if you’re interested in financing your car through them.
You will need to be at least 18 years old and a New Zealand citizen or permanent resident to be eligible for a car loan. If you do not meet these criteria, you may still be able to apply for dealer finance, but this will depend on the individual dealer.
While it may make sense to switch from a car loan to dealer finance partway through the agreement, this will generally not be possible.
Dealer finance is generally only available on new cars, meaning it will not be available to those who have already taken out a car loan on the vehicle. Furthermore, if you wish to pay off your car loan early, you may face additional fees or charges or may not be able to do so at all. Breaking your dealer finance agreement early may also bring additional fees.
If you encounter financial difficulties or fail to meet your repayments on either a car loan or dealer finance, your car may be repossessed and you may be liable for any outstanding amounts.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
When you’re a temporary resident in New Zealand, you want to see everything, which can be difficult without a car. Luckily there are some lenders that consider car loans for people on a work or study visa. Find out how to apply here.
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