Compare car dealership finance vs car loans

Save money by knowing your options before you jump into car dealership finance or a new car loan.

There are different ways to finance a new or new used car. Two of the most popular are car dealer/manufacturer financing and sourcing your own finance provider. But it’s worth understanding the difference between these two options so you can select the best route for you.

Car dealership financing vs car loans

Car dealership financing, which can include personal contract purchase (PCP) and hire purchase (HP), often comes with low interest rates, but you’ll usually need to make a down payment. This is the option that comes with the “hard sell”, because dealer selling you the car will usually earn more commission if you take out their finance plan.

Sourcing your own finance, though a broker or even by going direct to a lender, gives you a lump sum to work with and usually the freedom to approach whichever vendor you choose. Additionally, there’s a huge range of lenders out there to choose from, so if your credit record isn’t good enough for the dealer/manufacturer, you may well still find a specialist lender that’s happy to finance your new wheels.

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Just cut to the rates

The rate is everything, right? Well, no, but it is pretty crucial. Here are some of the key differences:

Dealership finance

  • 0% finance deals may be available, but…
  • These may be factored into a higher purchase price for the car, or there may be a fee attached – meaning that even though the interest rate is 0%, the APR (an annual summary of the cost of borrowing) isn’t.
  • The lowest rates may be reserved for models that the dealer is pushing at that time.
  • Commission for the car salesman may push rates up.

Sourcing your own car finance

  • A wide range of interest rates are available from a healthy market of competing lenders.
  • The very best rates are likely to start at around 3%.
  • If you’re willing to consider a secured “homeowner” loan, then you may be able to access a wider range of deals.

What are the benefits and drawbacks of each method?

Dealership finance

  • It’s convenient – the dealer finance representative handles the paperwork for you.
  • It could give you leverage to negotiate the sale price.
  • If you wouldn’t be able to afford a new car, HP and PCP deals can let you drive away in a smart new car for monthly cost and then either return it or buy it at the end of the plan.
  • You need good credit to be eligible
  • It’s usually only available for newer vehicles
  • Down payments can be a large upfront cost
  • Early repayment costs usually apply.
  • Depending on the plan you go for, you may not own the vehicle at the end of the finance term, and mileage restrictions may apply.
  • Usually comes with quite a hard sell (and the car dealers will usually want to get back in touch to sell you a new car or a new finance deal in the future).
Who is dealership finance best for?

People with excellent credit who want to buy a new car and have a down payment ready may prefer dealership finance – but it’s still wise to shop around.

Sourcing your own car finance

  • You can find the best deals online in minutes.
  • Specialist lenders can cater to non-model applicants – for example those with a damaged credit history.
  • Online “eligibility checkers” and “matching services” can help you find deals you’ll get approved for, without affecting your credit score.
  • You’ll own the car at the end of the term.
  • You can buy from any vendor.
  • No deposit required.
  • If you don’t put down a deposit, chances are the finance will cost you more overall
  • Early repayment costs differ between lenders

Dealer financing & car loan side-by-side

Who saved more money?

Julia and Charlie have both purchased new cars for £16,000 each. Julia opts for a car loan while Charlie takes on a financing option from the dealership — so who chose the better financing option?

Car loan

Julia’s car loan comes with a 5% rate for a three-year period and she pays £506 in monthly repayments. At the end of the loan she’ll pay a total of £1,193 in interest.

Dealer financing

Charlie, who takes on 0% dealer finance, pays £134.60 each month for the term of his loan. His £4,600 down payment means he’s only borrowing £11,400, resulting in lower ongoing repayments. He has to find £5,550 at the end of the three years, to buy the car outright, however, and he exceeds his mileage limit a little, and has to pay a £300 fee

When the car is paid off, Charlie will have paid less than Julia, but he had to find two lump sums of cash.

Bottom line

Convenience always comes with a price and that extends to the dealer-financed car loan. Before settling for what a dealer can offer, compare outside banks, online lenders and credit unions. In many cases, you’ll find terms that are better than the dealer’s.

No matter what route you choose when car shopping, always put in the time to research so you understand how to get the most out of your options for car loans.

Frequently asked questions

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