How to avoid getting a bad deal on your car loan
There are six things you should know before you think about getting a car loan through a dealership.
Getting a new set of wheels? You’ve done your research. You’ve narrowed down your shortlist, maybe even taken a few cars for a test drive. Now, how are you going to pay for it?
If like most people, you don’t have a big lump of cash under your mattress, arranging a car loan through the dealership might seem like a good idea. It’s easier to buy a vehicle and get it financed all in one place; right?
A word to the wise: negotiating car finance can be a ‘dangerous’ dance but you can come out on top if you have a little knowledge of the industry’s tricks up your sleeve.
1. Dealerships often rely on financing for their profit
When the salesperson organises your car loan it may not be the best deal for you. Sure, they’ll take care of the paperwork and get it processed quickly. That’s because dealers often have access to multiple types of finance. But, they may only offer you the one that has the best payoff for them.
2. Smoke and mirrors: are you really saving?
Dealerships may also mark up the cost of the car to make back any so-called discounts they give you on the interest rates, or vice-versa. This is sometimes called ‘price inflation’. Focus on negotiating the car price before talking about finance altogether – that way you know you’re paying a fair price for the car.
3. You are paying for the ‘middleman’ to get a cut
For car loan arrangements, the dealer is really just a ‘middleman’ between yourself and a lender, where they receive a commission for bringing the lender this business. This can significantly inflate the interest rate that you pay, your repayment amounts and the overall cost of the car.
4. The pressure to sign on the spot is deliberate
Being rushed on the spot increases the chances that the details of the contract may not be clear. Ask questions and lots of them. For example:
- Can I repay early?
- What are the penalties for early repayment?
- Are there any extra fees?
If the answers change or you get the feeling they’re trying to confuse you, you can call it off, regardless of how long you have been negotiating with the salesperson.
5. Pre-approval can give you the power to negotiate a good deal
Exploring your loan options before approaching the dealer can swing the advantage back in your favour. If you have a pre-approved loan when you approach a dealership, it might help you get a better purchase price on the vehicle as you will have a firm upper limit. You can avoid getting upsold by a fast-talking salesperson and focus on negotiating a good deal.
6. Homework always helps
Before you start negotiating on financing, shop around and do your homework so you know what dealers and other lenders are offering. Independent comparison sites like Canstar compare and rate 100s of car loans and finance offerings.
We also recommend reading independent review sites, such as ProductReview.com.au, for information on your prospective lender and loan from real (verified) customers’. Always carefully consider the interest rate, the comparison rate, the loan term, and the repayments: these can save you money in the long term.
The benefits of an online lending platform
Whether you’re buying a brand new car or a used vehicle, arranging your car loan from the dealer is not your only option nor necessarily the best. Online lending platforms offer a greater range of personal and car loans, which may allow you to borrow funds for extra on-road costs such as insurance and registration. Dealership finance may not include this extra value.
Remember, the financial services industry is more tightly regulated than car financing and compared to dealership car finance, car loans often have flexibility on things such as early repayments; reducing the time and overall cost of the loan.
Regardless of how you’re funding your car loan, do your research so you can choose the right option for you. Then you can focus on the fun decisions, like leather seats and your preferred car colour.
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Sebastian has over 12 years experience in consulting, marketing and finance. He has worked with Australia’s largest banks and emerging fintechs across lending, investing and insurance. Sebastian has a Bachelor of Commerce and Bachelor of Laws with Honours.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.