Dealer Finance vs Car Loan from Banks

Save money by knowing your options before jumping into a dealer finance or auto-financing from a bank.

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Singaporeans have two primary options when it comes to financing a new car, which is to take out a loan with a bank or receive financing through the auto dealer that is selling the vehicle. There are pros and cons with either option, so it is crucial to know the difference between these two financing options to select one with the better economic deal. Jump ahead to the price comparisons >>

Dealership finance and bank loans

Dealership finance refers to the finance options offered by a car dealership. Examples include Tokyo Century Leasing, Singapura Finance and Abwin usually come with extremely low interest rates or no interest at all. To provide lower interest and lower repayments, dealer finance tends to offer balloon scheme payment, which you will be required to pay large sum at the end of loan term. Learn more about balloon payment with our guide.

Some features of dealer finance are:

  • May offer lower interest rates than auto-financing from banks
  • Low interest rates may only be available for specific makes and models

With auto-financing from a bank, you receive a lump sum payment to purchase your vehicle. Car loan terms are between one and seven years.

Dealer financeAuto-financing from banks
Interest rates
  • Generally higher rates than auto-financing from banks
  • Low interest rates may only be available for specific makes and models
  • Commission for the car salesman may push rates up
  • May charge a one-time ‘admin fee’ as a means to generate additional revenue
  • Banks offer various rates, which means you can choose the most competitive
Loan term
  • Typically one- to seven-year terms
  • A balloon payment is payable at the end of the term for those who opt for this option
  • Early repayment costs may apply
Benefits
  • The dealer finance rep handles the paperwork
  • Convenience of purchasing the car and settling financing at the same time
  • Balloon scheme payment may be more suitable for you
  • 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 both new and used cars
Drawbacks
  • 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
  • May accept borrowers with slightly less desirable credit history
  • You need good credit to be eligible
SuitabilityBorrowers that want to buy a new car and prefer the convenience of getting financing with the dealership. Borrowers may also want to opt for balloon scheme financing.Borrowers that want to shop around and have the option of buying from an authorised distributor or a private seller.

What to know about balloon payments

One of the main draw of dealership finance is that they also offer balloon scheme payment. To keep your monthly repayments low, the PARF value of the car is excluded from the loan. You will not be charged interest on this amount, but you will be required to pay the PARF value at the end of the loan term.

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 or incur any late payment fees.

Dealer financing & car loan side by side

How much can they save?

Two friends Sean and Clay are both in need of a new car. After researching their options and choosing what kind of car they want to get, Sean opts for an auto-financing from a bank while Clay takes on financing option from the dealership where he made his purchase.

Considering that the two cars they purchased are the same price — $100,000 (with OMVs less than $20,000) — so who chose the better financing option?

Sean takes out 70% of the car loan at a 2.78% p.a. rate for a five-year period. Using a car loan calculator he sees that he will pay $1,329 in monthly repayments, and will pay a total of $9,730 in interest over the course of the loan term.

Clay, who takes on a balloon scheme loan at a 3.5% p.a. rate for a five-year period from a dealership, sees that he’ll be paying $1,175 per month over the term of his loan, assuming the ARF of his car is $10,000. He’ll be borrowing the same amount of money, but his residual balloon payment of $10,000 means he’ll only be charged interest on $60,000, resulting in lower ongoing repayments.

The results

Sean continues to pay $1,329 every month and at the end of the five years pays his car out in full. His repayments total $79,730 for his original $100,000 vehicle purchase (excluding the 30% downpayment). Clay makes lower ongoing repayments of $1,175, but when it comes to the end of his five-year loan term he’s responsible for paying $20,000.

This means he will need to ensure he has this amount saved by the end of his loan term, requiring him to put away $166.66 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 $1,341 per month to his loan (directly or indirectly). Compared to his neighbour Clay, his total repayments total $80,460, which is $730 more than Sean’s.

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 should be considered when weighing up your options. Clay and Sean should also look at the features offered to them by their lenders. For instance, are they able to pay out the loan early or make extra repayments? What are the costs involved if they opt for early settlement? Clay and Sean both need to look at their financing options as an entire package before signing on the dotted line.

Convenience always comes with a price, and that extends to the dealer-financed car loan. Before settling for what they are offering you should compare what the banks are offering. In many cases, the terms offered by the banks will far outweigh the flexible terms or financing options offered by dealers.

Always compare the rates and terms offered by a variety of different lenders before committing to a loan. There are numerous tools available to help you with this such as comparison charts and calculators. If you do your homework first, you can end up not only with a new car, but a financing deal that works well within your budget.

Picture: Shutterstock

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