Australians have a few options when it comes to financing a car, and you should make sure you know what each finance option entails before committing to one or the other. Different types of financing can cost more or less depending on the details.
Here are the pros and cons of the two most prevalent options – car loans and dealership finance.
Car loans
With a car loan, you’ll receive the full purchase amount in a lump sum, so that you can outright pay a dealership for your new vehicle. Typically, car loans last from one to seven years, and because the car you buy will be secured to the loan, interest rates will be lower than for an unsecured loan. The benefits to a car loan is that you can shop around for the best deal and choose your own lender. Your car will also be paid off completely by the time you finish your payments. Furthermore, you’ll have the option to buy from private sellers.
The drawback to car loans is that the interest might be a little higher than what is on offer from a dealership. Because the loan is secured to your vehicle, if you default on payments, the lender is entitled to claim your vehicle to recoup what you owe. There may also be additional fees involved with the loan.
Dealership finance
Many car dealerships have financing options which can seem very attractive due to lower (or in some cases, zero) interest on the loan, and subsequently lower monthly repayments. The important thing to note here is that dealership finance often involves a balloon payment at the end of your term. So, while your regular monthly payments are lower, you’ll still be required to drop a hefty lump of cash to clear the final payment. Of course, you might opt to refinance the balloon payment, but you’ll need to be absolutely clear of your obligations to settle the balloon payment when running the numbers.
The benefits to dealership finance is that there is far less paperwork involved, and you also get some leverage in terms of negotiating the sale price. The drawbacks are that this financing option is available only for new dealership cars, and that you have to have a strong credit score to be eligible.
To find out how to get the ideal deal on your new car, speak to our experienced team of mortgage brokers today.