Bank vs auto-dealer car loan – which should you use?
In the past, if you couldn’t afford a car, the salesperson would just demand the free keychain back and kick you out the door.
These days, auto-dealers are more accommodating. This is especially so with the COE drop to $25,000 on 4 July 2018, the lowest in 8 years.
Yeah, $25,000 is low. Try telling that to a car buyer in another country and you'll be met with looks of shock and maybe ridicule.
So even if you don't have that kind of cash, there are ways to pay for your car.
The only question you'll need to ask is: is it worth taking car loan from an auto-dealer instead of a bank?
There are 5 main ways that auto-dealers and banks differ, in the way car loans are given out. These are:
- Different interest rates
- Approval process
- Extra fees and charges
- Tie-up packages
- Promotional deals
Different interest rates
With few exceptions, bank car loans have a lower interest rate. The typical bank rate is between 1.88 to 2.7 per cent per annum. Some bank loans have an interest rate of 3% but this is mainly for used cars as the interest rate on used car loans is always higher. Among auto-dealers however, rates are between 4 to 4.8% per annum.
For comparison sake, consider a car loan of $84,000. At 2.7% per annum, over a 7-year loan tenure, the monthly repayment is $1,189 per month. The total interest paid over seven years is $15,876.
Using an auto-dealer’s loan at 4.8%, over the same period, the monthly repayment is $1,336. The total interest paid over seven years is $28,224.
The auto-dealer’s loan would cost you $12,348 more, over the course of the entire loan.
Note that car loans use rest rates, in which the interest is based off the original loan amount. This means that interest repayments do not decrease as you pay off your loan. The “real” interest rate, or Effective Interest Rate (EIR), is around double the stated rate.
This means that an auto-dealer’s loan, at 4.8%interest, has an EIR of close to 9.6% per annum. At that point, even personal loans from the bank may be cheaper.
Banks will review your credit report from the Credit Bureau of Singapore (CBS), and most have fixed standards for issuing loans.
Auto-dealers may be a little more flexible. For example, some of them don’t check your credit score, and only require the previous six months of your pay slips. This means they don’t see (or choose not to consider) factors such as past defaults, or late payment.
For this reason, many buyers consider auto-dealers to be a lender of last resort; they turn to the dealer’s “in-house financing” when the bank rejects their loan.
Extra fees and charges
Auto-dealers may include added fees and charges in the loan. A typical example would be a processing fee of $500, or late fees of $200. While banks may also have such fees, they tend to be lower than the auto-dealers.
For example, a bank loan often has a processing fee of under $200, and most late fees won’t exceed $150. Banks are also closely regulated, and are required to be more transparent with their charges.
An auto-dealer can be a bit sneakier. For example, an auto-dealer may offer you a lower rate of just 4% instead of 4.8% per annum; but the added processing fees, administrative charges, advance fees, etc. may add up to over $1,000, and you would end up paying the same amount anyway.
Some auto-dealers use “pass through” loans, in which they tie-up with a bank. These loans are actually just bank loans - the dealer is referring you to the bank.
For example, an auto-dealer may offer you a special interest rate of 1.88% with Bank X. If you were to approach Bank X directly, however, you may find the rate is 2.7% - you can only get the special 1.88% rate by buying through that specific auto-dealer.
In these specific cases, it’s possible for a bank loan to be cheaper when acquired through an auto-dealer.
Sometimes, car dealers will give out rebates or lower interest rates for specific car models. This mainly happens as a result of sale quotas - when the car dealer needs to move inventory, they’ll spice up the loan with freebies.
An example would be an immediate $500 rebate, for buying a car with the auto-dealer’s loan. Of course, this isn’t a significant sum in the long run, given the higher interest rate. But it’s a type of promotion that you probably can’t find among banks as there are tight restrictions on the sort of incentives banks can offer.
Overall, due to the greater flexibility auto-dealers have, they can make their loans more alluring. Besides rebates, their promotions tend to have more lavish gifts (e.g. a whole year of free servicing).
But don’t be fooled by these types of deals - they seldom make up for the ultimate price difference, between a bank and auto-dealer’s loan.
Which should you pick?
If you can get a loan from the bank, use that first - even if the freebies are not as fancy, or the loan application is more troublesome, you’ll save money in the long run.
Where possible, look for tie-up packages to find competitive interest rates.
You should only use the car dealer’s in-house financing as a last resort. Even then, be sure to compare options among the different dealers.