1% Car Finance – Too good to be true?

Some car dealers on TV have offered 0%pa or 1%pa comparison rates, which sounds too good to be true.

But we all know that nothing is free, so what’s the catch?

You may be surprised to learn that buying a new car with dealer finance could actually cost you more than purchasing the identical car with a standard car loan from your bank.

The table below is a simple example that compares (a) a car bought at full price with dealer finance at 1%pa with (b) being able to negotiate the price down with pre-approved funds from your bank.

OptionCar PriceLoan TermInterest
a$23,9903 Years1.00%pa$677$24,362
b$19,9903 Years6.00%pa$608$21,893

From this example you can see that the ability to haggle on the price may be more important than paying a lower interest rate.

Note: We are assuming that the car price is equal to the amount borrowed.

Why do dealers offer such a low finance rate?

Every car dealer wants you to visit their showroom, but that’s a really tough ask, especially in this super-competitive industry. When we see a 0%pa or 1%pa comparison rate, our first thought is “that’s a great rate”, so they have got our attention.

How can dealers offer such a low finance rate?

Most major car companies have their own finance division, so they can create an eye-catching rate to get you in the showroom door. However, they also need to recover the loss from the low rate deal. So, to qualify for the special finance deal you usually have to pay the full RRP (recommended retail price) of the car, plus full dealer delivery charges. That’s how the dealer can afford to give you a low rate. They’re not running a charity.

Questions you must ask a Car Dealer

At First Option we’ve been providing car loans for over 50 years, so we’ve heard it all. From our experience, here are some questions you must ask the car dealer.

  1. How long is the finance term? Many of the car finance deals around are only for 3 or 4 years (First Option Bank currently gives you up to 7 years). With a shorter term, the monthly repayments will be higher, so the dealers often include a balloon payment – but more about that later.
  2. What are the total repayments over the life of the loan? This is the number that really counts. This is the amount coming out of your pocket.
  3. Is the low finance rate attached to the price of the car? In other words, can I negotiate the price of the car if I go with the dealer finance? Usually the answer will be no, and they’ll throw in some free floor mats that cost half as much at Super Cheap Auto.
  4. Is there a balloon payment at the end of the finance term? This is a lump sum that you owe the lender at the end of a loan term, after all regular monthly payments have been made. This can be deceiving as it reduces your monthly loan repayment amount, but you then have to cough up a few thousand dollars at the end.
  5. Are there any other fees payable? If you’re getting the finance through the dealer, you’re not in a strong bargaining position. They may try to charge you extra fees. It might be a monthly loan admin fee, an early payout fee or dealer delivery costs.

Our Recommendation

At First Option we are 100% member-owned, so we do what’s best for our members. Our best tip is to shop around for the best overall deal, not just the lowest rate. Just because you found a great car in the colour you wanted, doesn’t mean they also have the best finance deal. It might be convenient to sign up on the spot, but you could walk away paying much more over the long term.

By getting a car loan pre-approved at a bank you can trust, you’ll walk into the dealership with the upper hand, and most importantly, the power to negotiate on price.

Share Your Experience

The next time you see a car ad on TV offering a low finance rate, see if you can read the fine print at the bottom of the screen. If you’re like me you’ll have to pause the ad, put your glasses on and walk right up to the TV. You might be surprised by some of the conditions.

And if you’ve ever bought a car using finance from a car dealer let us know about your experience. Was it good or bad? Were there any extra fees you had to pay? Please share your story with us.

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