You will often hear people make blanket statements about dealership finance. The rate will be too high, or they will stiff you with fees!
All anecdotal and based on a single experience, without a direct point of comparison.
What you may not know is that it has become difficult to get a car loan directly from a bank. Yes, it is still possible. They just write fewer loans compared to years gone by.
Both dealer finance and bank auto finance have their place serving a different type of customer. But how do you know which category you fall into?
In this article, we will conduct a detailed comparison on a number of aspects of the financing process.
You can then match the channel that excels against the criteria that best matches your own needs.
Financing Source Definitions
Dealer Financing
Not all dealer finance service offerings are of the same quality.
There are excellent operators who will find you the best possible loan option, and there are cowboys who will act entirely out of self interest.
For the purpose of this article, we are assuming that you are dealing with a qualified finance broker who is at the top of their game.
Gusto Auto has a sister brokerage named Gusto Finance has an expert team that handles all of our finance enquiries, and also for a number of independent dealerships around Australia.
So how do you tell good operators from bad? You can get some idea by checking they are an accredited Finance Broker, and not just a Finance Manager, or business manager.
Brokers will have access to a larger panel of lenders and have a higher regulatory standard to uphold compared to someone who dabbles in finance amongst other things.
Note: Finance obtained directly through a vehicle manufacturer is excluded from this comparison. This is a whole other category compared to in-house finance at a used car dealership.
Bank Auto Finance
For the purpose of this comparison, bank finance refers to a direct loan application made to a mainstream bank or credit union.
They both have similar approaches to auto finance and the direct application means you are dealing with one financier.
Bank Finance vs Dealership Finance Comparison
Below are 9 elements of auto finance that will differ between the two sources of funding.
The elements you care most about will be unique to you so as we go through you can tally up which is the superior option against each criteria.
Product Range
When applying directly to a bank you can only access that specific bank’s products.
Your options may be limited to a secured car loan, or an unsecured personal loan.
There may be some interest rate tiers that you can qualify for if you meet set criteria.
If you also have a mortgage with the same bank they may be able to offer special rates that you cannot get elsewhere.
Dealer finance that is conducted through a competent broker would facilitate that one application accessing upwards of 40 different car loan providers.
This allows you to find the best interest rate for your situation (which could include a bank), but also find the best match for what you are trying to achieve.
Low rates count for nothing if you are not approved!
Likelihood of Approval
The reality is that Australia’s banks love mortgages, they don’t love car loans!
While most of the big names still advertise car loans, their appetite for these loans is much more restricted than a few years ago.
You are more likely to be approved for a car loan if you have an existing history with the bank, potentially a mortgage customer, and a high credit score.
But a large number of potential customers will not meet their elevated lending criteria.
This is the greatest power of dealership finance, or using a finance broker to manage your loan application.
Your application is matched with the lender where you are most likely to get an approval, and the best rate possible from the lenders where you meet all criteria.
This could still mean a loan from a big bank, or perhaps there is a smaller non-bank lender that also has a competitive rate and willing to approve your application where others will not.
This is especially important if you have had credit problems in the past.
Application Convenience
A bank finance application can be reasonably straight forward if you are an existing customer and there are no curveballs in your application.
But if you are not approved you will have to start from scratch elsewhere… and with a fresh loan rejection visible on your credit file that may take some explaining at the next bank or credit union.
When applying through a dealer you will only have to make one application which will then be packaged up and relayed to the most suitable lender.
We have already covered the potential to match with a greater number of lenders. But if one says no, then you can move on to the next without any additional effort.
The dealer or broker will handle this all for you.
Speed to Resolution
When you apply directly with a bank your application goes into the queue and you will hear back when it is your turn.
This could be a day, or it could be almost a week. Fast turnarounds can happen, but they are not the norm.
When applying through the dealership they will know the turnaround times of their lenders and can usually get a faster response.
In the past, we have managed multiple applications from enquiry to settlement within the same day!
A bank will not be able to do this.
Given that our brokers have working relationships with the lenders there is also an ace up our sleeve if an application must be expedited for special circumstances.
Troubleshooting Problems
Speaking of working relationships, if there is an issue that would usually lead to a declined loan application our brokers will always jump on the phone with the lender to understand the issue.
Perhaps you need to reduce your Buy Now, Pay Later use, or pay off a small debt to free up some additional servicing capacity.
Whatever it is, a broker will be on the front foot to resolve the issue.
When dealing directly with a bank it is rare that they specify the exact reason for a decline.
So you may not know what problem needs to be solved or if it is solvable at all.
This lack of information places you in a very passive state when receiving the loan decision and you have little right of reply and just have to move on.
Influence over Vehicle Price
When a dealership organises finance for you they are usually going to get a commission as part of the loan settlement.
So there is a financial incentive there for the dealership to find suitable finance for you.
The opportunity to earn a bit extra could also motivate the dealership to be more flexible on the price of the vehicle than they otherwise would.
This is not a hard & fast rule of course, but it is a negotiating chip you can use when discussing price.
There is also an argument that a pre-approval from a bank is also a powerful negotiating tool. It shows you to be a serious buyer who is organise and ready to make a deal.
However, until the bank know what you are planning to buy then that pre-approval is only part of the story.
Whether a dealer will respond positively to this is uncertain.
Asset Type Flexibility
A lesser know, but critical factor, when assessing you for a loan is the vehicle you intend to buy.
Each lender has their own set of criteria for what they will hold as security, and what they will not.
The age of the car, KMs on the clock, and a number of other factors could prevent you from getting approved even if your credit history is immaculate.
A bank may not finance that older used car.
Having access to the broad lender panel via the dealership could make all the difference here.
Fee Structure
If you qualify for the bank loan, and apply directly, then this is likely to have the fewest fees attached.
Establishment fees can be a significant cost and these are often quite moderate directly through the bank.
If you get a bank loan via a dealership then an additional fee will be added which skews this equation in favour of going direct!
However, for reasons we have discussed throughout this article the broker fee is well earned in circumstances where their expertise is critical to getting the loan approval.
Non-bank lenders may also have higher establishment fees depending on your individual circumstances.
Overall Cost
The other missing component is the interest rate. Add in those fees to get the total cost over the life of the loan.
Making any kind of conclusion here is impossible with every individual situation being different.
A direct to bank loan will often come out ahead despite having a higher interest rate once you account for the fees.
The tricky part is actually qualifying.
Dealership finance could be more expensive overall, but this is usually due to the type of finance you have qualified for rather than a byproduct of the dealership’s involvement.
No matter the source, lenders are obligated to provide documentation that details the cost of finance over the life of the loan, and what your repayments will be.
Understanding this detail is critical before you commit to a loan.
One key difference is that a dealership representative may be more accessible in providing personal assistance to ensure you know what you’re are signing up for.
Assuming you are dealing with a competent and ethical operator.
Comparison Summary
Bank Finance is Most Suitable
When you have an existing relationship with a bank and a flawless history in your dealings with them.
Your credit score is very good and potentially also a property owner.
If you can apply directly to the bank and be confident of an approval then this is going to be the cheapest option for your car loan.
Dealer Finance is Most Suitable
If you are unsure of the best finance options for your circumstances and would like personalised assistance to find the most suitable options for you.
If your credit score is less than outstanding you may need some direction to ensure you are placed where you can be approved.
When buying a vehicle more than a few years old then you may also need that expertise to be matched with a lender that will finance the type of vehicle you are trying to buy.
Conclusion
If you are unsure what finance channel suits you best then get in touch with our expert team for an obligation free consultation.
There is not impact to your credit file until you formalise a loan application with a lender so there is no downside to starting a conversation.
However, if you are confident that the direct to bank channel is right for you then we encourage you to pursue this.
If the outcome is not as expected for whatever reason, the team will be here to help.
