Dealer finance or a broker: which one actually costs you less

The finance desk at a dealership is a profit centre, not a favour. That does not make it a rip off, but it does mean the number you are quoted in the showroom is rarely the only number available to you.

The question worth asking is not whether dealer finance is good or bad. It is whether the deal in front of you is the sharpest one available on that car, on that day, and what the gap costs you if it is not. Spread across a five year term, a small difference in rate is not a rounding error. Neither is a few thousand dollars of extras financed at the same rate as the car and paid off over the same five years.

What changed, and what did not

Flex commissions were banned in Australia back in 2018, so a dealer can no longer quietly lift your interest rate and keep the difference. What has not changed is everything sold alongside the loan: extended warranties, paint protection, gap cover and the rest. Those get rolled into the amount financed, so you pay interest on them for the life of the loan.

Under the old arrangement the rate the lender wanted and the rate you were charged could be two different numbers, and the spread went to the dealership. That is gone. Commission is still paid, it is simply structured differently, and it has to be disclosed. Ask what it is. A straight answer is a good sign.

The other thing that has not changed is the setting. You are tired, you have already fallen for the car, someone is waiting in the car park and the finance manager does this several times a day. That is not a conspiracy. It is just a poor moment to be reading a credit contract for the first time.

Where the dealership desk genuinely earns its keep

Dealer finance is not a trap by default. On new stock in particular, manufacturers sometimes subsidise a finance campaign to move a model, and a subsidised rate can be genuinely hard to beat anywhere else. The desk is also fast. If you want to drive it home today and the finance is approved in the showroom, that is a real convenience and it has a value.

The catch with a campaign rate is the conditions attached to it. A subsidised offer will often require a set term, a minimum deposit, a balloon payment at the end, or a purchase at the full drive away price with no discount off the car. Any of those can be fine. They just need to be counted. A cheap rate on a car you paid two thousand more for is not a cheap deal, and the only way to see that is to compare total cost against total cost.

What a broker does with the same application

A broker is accredited with a panel of lenders and works the file from the other direction. Instead of one set of rules to fit you into, there are many, and the job is matching your situation to the lender whose policy already suits it.

That matters more than most people expect, because plenty of applications are not a pricing question at all. They are a policy question. Self employed for eight months. Paid in casual shifts. Buying a fifteen year old four wheel drive. Recently moved into a new industry. One lender will decline that outright and another will fund it without blinking, and the rate is a separate conversation that only starts once you are with a lender who says yes.

Worth being clear about who does what here. Compare City compares lenders and refers your enquiry on. We are not a lender and we do not hold a credit licence, so the application itself is handled by an accredited partner brokerage.

Compare the comparison rate, not the headline

A headline rate ignores fees. The comparison rate folds most of them back in, which is why two loans advertised at the same rate can cost very different amounts. Ask for the total amount payable over the full term. That one figure settles most arguments.

Does a balloon make an offer look cheaper than it is?

It can. A balloon, sometimes called a residual, is a lump sum left owing at the end of the term. It lowers the monthly payment by pushing part of the debt to the finish line, so a quote with a balloon and a quote without one are not comparable even at the same rate. Compare on the same term, the same deposit and the same balloon, or you are comparing the presentation rather than the loan.

What the comparison rate still leaves out

The comparison rate is a standardised figure, calculated on a set loan amount and term so that lenders can be lined up against each other. If your loan is a different size or a different length, your real cost will not match the advertised comparison rate exactly. It also does not capture optional or event based fees, such as an early payout fee you may never trigger, and it does not account for a balloon payment sitting at the end of the term.

An example of how two identical rates come apart

This is an illustration only. The figures are invented, deliberately round, and not a market rate. Say two lenders both advertise the same interest rate on a thirty thousand dollar loan over five years. The first charges no establishment fee and no ongoing fee. The second charges a five hundred dollar establishment fee and fifteen dollars a month. Over sixty months that second loan costs five hundred plus nine hundred, so fourteen hundred dollars more, on an identical headline rate. Nothing about the advertisement tells you that. The comparison rate and the total payable both do.

One credit enquiry, not five

Every application you lodge lands on your credit file. Applying to four lenders in a week to see who bites is the fastest way to look desperate to the fifth. A broker reads your file once and takes it to the lenders most likely to say yes.

Does shopping around damage your credit score?

Asking for a quote or an indicative assessment generally does not, because no application has been lodged. Submitting an application does, because the enquiry is recorded. Those enquiries stay on your file for years, long after you have forgotten the afternoon you spent filling in forms.

A single enquiry is background noise. A cluster of them in a short window is a signal, and not a flattering one, because an assessor cannot tell the difference between a careful shopper and someone who has been knocked back repeatedly. Under comprehensive credit reporting your file also carries your repayment history on existing accounts, so missed payments on a phone plan or a card show up in the same place. If the file is going to be pulled, it is worth knowing what is on it first.

Turn up already approved

A pre-approval makes you a cash buyer at the negotiating table. You end up talking about the price of the car instead of the size of the repayment, which is where a lot of margin quietly hides.

Is pre-approval the same as formal approval?

No, and the difference is worth holding onto. A pre-approval is a lender saying it is comfortable with you, based on the information it has, subject to conditions. Those conditions usually include verifying your documents and assessing the actual asset once you have chosen it. A pre-approval also has an expiry, and it can be affected if your circumstances change between the approval and the purchase.

Formal or unconditional approval comes later, once the lender has the vehicle details, the invoice or the seller's information, and everything it asked for has been sighted and verified. Do not hand over a deposit on the strength of a conversation. Get the position in writing and read what it is conditional on.

The products sold next to the loan

Extended warranty. Paint and fabric protection. Gap cover. Tyre and rim. Window etching. Some of these are worth having and some are not, and that call depends on the car, how long you intend to keep it and what your insurance already covers.

What matters for the finance is that every dollar of it is usually added to the amount financed, so you are paying interest on a warranty for five years. Ask for each one to be priced separately, ask what the loan looks like with all of them stripped out, and then decide on each product on its own merits. Ask, too, what happens if you pay the loan out early. Some of these products can be cancelled with a partial refund and some cannot, and it is a much better question to ask before it is on the contract than after.

Worth asking before you sign

• What is the comparison rate, and what is the total payable over the term?
• Is there a balloon or residual, and what happens when it falls due?
• What does it cost to pay the loan out early?
• What has been added to the amount financed that is not the car?
• Is the rate fixed for the whole term, or can it move?
• What are the establishment and ongoing fees in dollars, not as a percentage?
• Is this a campaign rate, and what conditions am I agreeing to in order to get it?
• Who is the lender, and who is being paid a commission on this contract?

What a lender looks at on a car loan

The assessment is much the same regardless of who lodges it, which is worth knowing because it means the application itself is not what makes the difference. The lender, and the terms that lender offers you, is what differs.

• Your income, how it is earned, and how long you have been in the job or self employed
• Living expenses and existing commitments, including credit card limits rather than balances
• Your credit file, including defaults, judgments and recent credit enquiries
• Dependants and marital status, which affect the expense assessment
• Deposit or trade-in, and the loan amount against the value of the car
• The car itself: age, kilometres, and whether it is new, used, dealer or private sale
• Residential stability and whether you own, rent or board
• The term you have asked for and any balloon at the end of it

What to have ready before you start

Whether you go through the showroom or through a broker, the assessment looks at much the same things. Having the material together shortens the process and keeps you from lodging an application that was never going to fly.

• Photo identification, and a second form if you have it
• Recent payslips, or two years of tax returns and financials if you are self employed
• Bank statements covering the last few months of transactions
• Your ABN and GST registration details if the purchase is for a business
• A list of existing debts with limits, balances and repayments, including cards you never use
• An honest set of living expenses, because the lender will check them against your statements
• Details of the car, the dealer invoice or the seller's information
• Where your deposit is coming from, and evidence of it

Lenders in Australia have responsible lending obligations, which in practice means they have to verify that a loan is not unsuitable for you rather than take your word for it. Tidy statements and a realistic expense figure are not just paperwork. They are the assessment.

Where this usually lands

Dealer finance wins on convenience and occasionally on a subsidised campaign rate. A broker wins when your situation needs a lender chosen to fit it, when the add-ons need pulling apart, or when you would rather negotiate the car with your finance already sorted. The comparison is not showroom against broker in the abstract. It is this contract, on this car, against what else was actually available to you.

If you want the panel compared before you walk in, start with car loans, or get a pre-approval sorted first.