Buying a new or used car comes with its share of excitement as well as responsibility. Imagine a situation: you have zeroed in on that brand new model, got all the pricing quotes ready, and are sitting across the negotiation desk. But then it hits you, “Oh, I almost forgot to scan through my financing options!” Don’t let this ever happen.
If you are shopping around for a car loan, there are three options to go about it -- secure your financing from a bank, get it approved through a broker, or approach a dealership. Now, which alternative is best for you? Without knowing the pros and cons of each, the decision can be truly an overwhelming one.
According to a report in Trading Economics, the Australian market for new car sales shows the following figures:
You can see that the sales of new vehicles reached a record high of 102,000 units in June 2017. Quite huge, I must say! With such a rising demand, settling over the correct choice seems really inevitable.
Today, in this article, I shall try to guide you through the question my clients often ask me -- which type of lender is the best? Bank vs broker vs dealership -- who should I opt for? By doing the right homework, you will not miss out on the best negotiable price. Yes, just like you won't dive into a pool without adjusting your body position, similarly car financingsimply can't go right without a well-outlined plan.
This brings us back to the same question -- choosing among the three options -- bank vs broker vs dealership. So here we go!
Financing Through A Broker
- This independent financial mediator has access to an extensive list of lenders. With a wide range of loan types that meets specific needs of the borrower, a broker can curate a financing option that suits you just right. As a customer, you can opt from the following alternatives:
- Novated Lease
- Finance Lease
- Commercial Hire Purchase
- Chattel Mortgage
- A broker is seen as a client to banks. Therefore, they get better rates, faster service, and quicker approvals. Reason for better rates? Of course, the sheer size of business a broker gives to any bank. They also pay for all their overheads that the bank usually pays for its own staff, rent, and others. Hence the latter can easily discount the rates given to the former.
- You get an added advantage of flexibility. Whenever a certain bank says no, a broker can assist during the most difficult circumstances by securing an approval from other lending options. You can expect a positive outcome even when you have a poor credit history or are the owner of a startup. Oh yes, you can just avoid those potholes and land with the right financial solution.
- Yet another scenario is when you are considering to buy a used vehicle. In such cases, getting a loan approved through a bank is a lot tougher. Such specialist banks who consider these kind of loans are usually accessible only through a broker.
- The brokerage market is highly competitive. A broker will therefore try to offer you the best deals with the aim of expanding his/her client base.
- A broker thoroughly goes through your specific needs and requirements. Hence, approval through this agent might take some time.
- Since they are linked with several lenders, they might have favourites and prioritise few over others.
- As they deal with several types of loans, they may not have expertise with each type of financing option.
- Also, they lack direct access to vehicle purchasing.
- According to an article in Empowered Finance, here is a comprehensive summation of the facts of why you should go for a broker instead of a bank.
Financing Through A Bank
- Any bank usually deals in secured car loan options. Therefore, if you already have a relationship with the bank -- through a salary or credit card account -- you can get your loan approved quickly. But yes, credit history does play a significant part.
- They will generally follow a step-by-step checklist. If you don't meet their guidelines, they might decline your loan application.
- Bank staff continually moves on due to promotions or leaving for other reasons. This is frustrating for return clients who just want to deal with the same person as last time. The former option is definitely easier for clients. They don't have to explain their business or background again.
- Banks go by the thumb rule of one product, one rate, and one set of fees. So even if you are a first-time borrower, you have asset backing, and an ‘A’ on your credit score – you end up with the same standard bank offer just like everyone else.
- Do you have a bad history with your current bank? Such as delays or defaults in credit card payments or overdrawing of your savings account? These are yet other criteria that would count against your application approval.
- Issues such as casual employment, credit impairment, or going for a second-hand vehicle again fall under the strict scrutiny of banks -- making securing a car loan a lot harder.
Financing Through A Dealership
- A dealership's major advantage comes in the form of quick approvals. You want a car ASAP, and there! The dealer will offer his in-house financing option and you can take your vehicle directly out of the driveway. Right now, right there!
- Dealership finance does have a bad reputation in the market. Main reasons are the excessive rate and commissions they charge. As margins have been squeezed on the sale of new and used cars, the dealers’ finance departments resort to making their income from the sale of finance of the cars they sell. This involves using excessive finance packages offered by their lenders. They load up the finance product to the client with maximum commission. And yes, the client ends up paying for this.
- Dealers have also now introduced the 0% or low 1.9% interest rate packages. A great marketing strategy for the dealers, but the poor client ends up paying for this -- as the car prices are usually inflated to cover this low rate offered.
A gist of how you can save on the total cost when buying from a broker vs a dealership is explained in the simple calculations below:
So here it is. You have it all clear before you. Choose the option -- bank vs broker vs dealership -- that you think best meets your specifications. The decision is up to you. But if you want my recommendation, I would go with the broker. They will enable you to avail the best rates in the market. With specialised industry experience and access to a massive lender panel, a broker will work with you to see what best suites your requirements.
Whenever in doubt, it is always recommended to seek counsel and advice from your accountant.