The low-down on car finance
Just like home buying, purchasing a new car is always an exciting step in life. You’ve done your research and due diligence, you’ve read all the reviews of the car you want to buy, and you’ve begun seeing a lot more of that car on the streets. You haggle with the car salesman, and once you’ve agreed on a price, you think quietly to yourself that you’ve secured a pretty sweet deal. Once you’ve decided you’re buying that car, you just want to own it already.
It’s most likely for this reason then, that getting a loan to complete the purchase can feel like an unnecessary barrier between you getting in that car and driving it into your garage. Car showrooms recognise this and capitalise on it, with the vast majority of car lots having an inhouse finance option for you. They always trade on promises of getting it done quickly and easily, because who doesn’t like simplicity, speed, and convenience?
Just like home buying, you’re best not leaving your finance to the last minute. In fact, understanding your options, what kind of deposit you’ll need, and how much you can borrow are all best looked at before you’ve decided on a car itself. After all, there’s no point dreaming of the beautiful new Ferrari you’re going to buy, if you’re looking at more of a Fiat budget.
However, unlike home buying and the associated loans that allow you to complete the purchase, the margins on your car finance aren’t fixed. Let me break it down.
When you get a home loan, the rate through a broker will be the same (if not better in many circumstances) than the bank. With most banks outside the Big 4, you can look at the options that brokers are presenting to you, and the interest rate will match exactly that on the banks website. Very simply, brokers aren’t adding any “fat” into the loan. Their commission is set, regardless of the interest rate you’re going to pay, because as I’ve written about elsewhere, the commissions paid to mortgage brokers on home loans is essentially just the cost of acquiring business for the bank.
However, when it comes to car and asset finance, the commissions to the person who organises that loan for you is set above a base rate, and increasing the interest rate will increase the commissions. So for example, the dealership may be able to get money from CBA at 4% interest, however they’ll write a loan with a 5% interest rate. That 1% margin ends up being their commissions. There’s nothing inherently wrong with this, after all, it’s akin to paying a fee for service in a lot of ways, but it’s still important to know.
Why is this important to know? Because if you feel like you got a great deal on the car, then the car dealership is going to need to make it’s money somewhere, and most of the time, they make it on the finance.
Very rarely do dealerships give their best offer on car finance, and usually only bring the rate down when you push back hard against them. If you really have got a cracking deal on the car, it’s unlikely you’ll get one on the finance too. The best way you can maximise your chances of getting a good deal on both the car itself, and the finance that goes with it, is to look at your options through a broker also. So do yourself a favour. Next time you’re beginning the process of hunting for a car, add visiting a broker into the mix. Hopefully, you’ll be able to get the car you want at a good price, and you’ll be able to borrow the money needed to do so cheaply as well.