Bank loan vs dealer finance in NZ

You have found the car. The dealer says they can sort the finance today, right there at the desk. Your bank says it can lend too. The question is which to use, and whether you can use both to your advantage. This page is about that moment, not about lender types in general.

Car Finance Guide is a guide, not a lender or a dealer, and the numbers in the example are made up.

The short answer

Get a figure from a bank or credit union before you visit the dealer, then ask the dealer to beat it. If the dealer’s finance comes in lower in total, take it. If not, use the bank loan and buy as a cash buyer.

You do not have to choose in advance. Having a bank figure is what gives you something to measure the dealer’s offer against.

How the two work

A bank or credit union loan. You apply to the lender yourself. It checks that the loan suits you and that you can afford it, then lends you a set amount. You pay the seller with that money. The seller does not know or care how you funded it.

Dealer finance. The dealer offers to arrange the loan as part of the sale. Sorted explains that dealers often offer loans that a finance company actually provides, and that they may sign you up during the purchase. The dealer is the go-between. Check whose name is on the contract, because that is who you owe.

The Commerce Commission’s 2021 review of motor vehicle finance found that dealers often arrange finance and assess add-on suitability on behalf of lenders, while also earning commission on sales.

What the dealer earns

This is the part buyers rarely get shown.

A dealer makes money on the car, on trade-ins, and often on the finance and the extras that come with it. The Commission’s review looked at the products sold alongside financed vehicles: mechanical breakdown insurance, shortfall cover after a total loss, credit-related insurance, and repayment waivers. It found their cost was added to the vehicle loan. Of 62 consumers it interviewed, some did not understand the add-on or did not know they had bought one.

None of that is illegal on its face. Lenders are responsible for making sure the people arranging finance on their behalf follow the Credit Contracts and Consumer Finance Act. But it does mean the person across the desk has a reason to keep the sale moving, and a financed add-on is a quiet way for the total to grow.

You cannot always see the dealer’s cut. What you can do is ask three direct questions: how are you paid for arranging this finance, which items in the loan are optional, and what is the total I repay.

Where each one wins

A bank loan tends to win on:

• Price, when your file is strong enough for the bank to lend at its better rates.
• Clarity. The loan is separate from the car, so the price of each is easy to see.
• Negotiating. A cash buyer can concentrate on the car’s price.
• Private sales, where there is no dealer to arrange anything.
• Flexibility. A personal loan is not tied to one dealer or one car.

Dealer finance tends to win on:

• Convenience. One visit, one set of paperwork.
• Reach. The dealer’s finance company may lend on a car or a profile that your bank would not.
• Promotions. Some dealers offer a promotional rate on certain cars. These can be good, and they are worth checking in writing, including what happens to the rate if the promotion ends or the conditions change.
• Older or unusual vehicles that banks pass on.

Neither wins every time. The numbers decide.

Pre-approval and why it matters

Sorted says banks and credit unions can pre-approve a loan, so you know your borrowing limit before you shop. That does three useful things.

1. It sets a ceiling, so you do not drift into a dearer car at the yard.
2. It gives you a benchmark rate to test the dealer’s offer against.
3. It means you can say “I have finance sorted” and move the conversation to the price of the car.

Pre-approval is not a final loan. The lender still checks the car and your circumstances at the time you borrow, and lenders decide case by case. Treat it as a planning tool.

Add-ons: the part that quietly inflates the loan

When extras are rolled into the loan you pay interest on them for the whole term. A $1,800 insurance product on a five-year loan at 15.5% costs well over $1,800 by the time you have paid it off.

Consumer Protection says insurance or extended warranties can be a condition of credit only if they cover reasonable risks and do not duplicate cover you already have. It also says the seller or lender must check the insurance suits you and that you can afford it, and must give you a copy of each policy. You can decline cover that does not fit your situation.

Ask for each add-on to be priced separately, on a separate line, and ask what happens if you do not take it. If the answer is that the loan will not go ahead, ask why, and take that to another lender.

A worked example

This is an illustration only. The rates, fees and add-on price are round numbers made up for the example. They are not quotes.

You are buying a $25,000 car with no deposit, over five years, paid monthly.

• Bank loan at 11.5% a year, no fees. The repayment is about $549.82 a month. Over 60 months you repay about $32,989, so the cost of borrowing is about $7,989.
• Dealer finance at 15.5% a year with a $400 establishment fee added to the loan. The repayment is about $610.95 a month. You repay about $36,657, which is about $3,668 more than the bank loan.
• The same dealer finance with a $1,800 insurance product added to the loan as well. The repayment rises to about $654.25 and you repay about $39,255. That is about $6,266 more than the bank loan, and the add-on alone adds about $2,598 to what you repay: the $1,800 product plus about $800 of interest on it. You may or may not have wanted it.

Now the negotiation. Suppose you tell the dealer you have a bank figure of 11.5% with no fees. The dealer may match it, may come down some of the way, or may say it cannot. Any of those answers is useful. If the dealer matches, you have the convenience at no extra cost. If it cannot, you have the bank loan to fall back on.

What to do next, step by step

1. Decide your ceiling. Work out a repayment you can afford, after your other bills, with a buffer.
2. Ask a bank or credit union for a figure on the amount and term you want. Write down the rate, the fees and the total repayable.
3. Shop for the car, not the finance. Agree the price of the car first, separately from any finance.
4. Ask the dealer for its finance offer in writing, in the same terms: amount, term, rate, fees, total repayable.
5. Ask what is optional. Have every add-on priced on its own and keep only the ones you want.
6. Compare the two totals side by side. Our page on the comparison rate explains how to include fees when you compare.
7. Read the disclosure statement before you sign. If it is wrong or missing, Consumer Protection says the lender cannot make you pay fees or interest for that time.
8. If you want help comparing offers, the /check form can pass your details to a broker partner. Using it is optional. Our disclosure explains how the site is funded.

For how banks and specialist lenders differ, see bank vs finance company car loan, and if the dealer’s contract is called hire purchase, read hire purchase vs car loan.

Checklist

• You have a written figure from your own bank or credit union.
• The price of the car is agreed separately from the finance.
• The dealer’s offer is in writing, with the total repayable.
• Each add-on is priced alone, and you have kept only what you need.
• You know whether there is an early repayment fee.
• You have checked the car on the PPSR.
• You have not signed anything you have not read.

Red flags

• “The finance is only available if you take the warranty and the insurance.”
• A dealer who quotes only the weekly payment.
• A change in the rate or fees between the verbal quote and the paperwork.
• Pressure to sign before you have taken the documents away.
• Reluctance to say how the dealer is paid for the finance.
• Being asked to sign blank or part-completed forms.

If you hit trouble with repayments later, tell the lender early. MoneyTalks gives free, confidential help on 0800 345 123.

Sources

• Sorted: car loans
• Commerce Commission: report on motor vehicle financing and add-on products (2021)
• Consumer Protection: hire purchase and buying on credit
• Consumer Protection: what lenders must do
• ASB: car loan