Car dealership finance

What is a balloon payment?

A balloon payment is a large lump sum paid out to the lender at the end of the loan term, after all regular monthly repayments have been made. This is also known as a Residual Value Payment if you’re leasing.

The lump sum payment at the end of the loan term will generally account for a large proportion of your loan’s balance, so your regular loan repayments over the term of the loan can be reduced as a result. However, while it can support your cash flow during the term of the loan, you’re paying more interest over the life of the loan. This is due to the balloon or residual value payment that isn’t paid down until the end of the loan term as a lump sum.

Balloon or residual value payments are common in leasing agreements but are also used in car finance.

Are the repayments all-inclusive?

It’s not uncommon for finance offers to include costs like stamp duty, servicing and insurance. This means your repayments will include these costs, plus the purchase price of your car.

While this might seem like a great idea, remember you’ll be paying fees and interest on the total amount you borrow.

Also, be mindful that you may not get to choose who insures or services your car. These costs are generally cheaper if you shop around and choose your own insurer or mechanic.

Does the dealer get commission?

Car dealerships get commission when you purchase a car - and a higher commission when they use their own finance company.

Though this type of finance can be quicker and easier, keep in mind they’re making money from your purchase.

This means the car price may be inflated, because the higher the price of the car, the higher the loan and the higher their commission.

Do I need an extended warranty?

Car dealers also earn a commission from 'add-ons', such as extended warranties and alarm systems.

Be sure you understand exactly what the extended warranty covers and do not sign anything until you understand what’s included. 

Extended warranties tend to be expensive and there are laws to protect consumers from being pressured into purchasing them.

Extended warranties may or may not give you any extra rights in addition to your automatic customer guarantees rights under consumer laws. Consider what’s covered under the Australian Consumer Law, opens in new window (ACL) in comparison to the extended warranties being offered. You’ll still have protections under the ACL even after your warranty period has ended.

Can I see the invoice?

The invoice will show you the exact itemised price of the car. For instance, you may pay $20,000 for a car that's actually worth just $18,000.

That extra $2,000 might be made up of car mats, mud flaps, bull bars and so on. These items can often be bought outside of the car dealership for much less.

Are you buying your first car?

If you’re a young adult and haven’t set up a bank account or made a large purchase before, have a look at our banking tips for young adults for some general information and guidance.

Important questions to ask the car dealer

If you’re buying a car through a car dealership, print off these questions and take them with you.

Interest rates

• Is the loan fixed or variable interest—and can I choose either?
• What's the annual interest rate?
• Is the rate influenced by my credit rating?
• What is the comparison rate—are there added fees in this rate?
• Is it an introductory rate, and if so what is the rate once it expires?

Fees

• Is there an application fee?
• Are there administrative or monthly servicing fees?
• Is there a fee to pay off my loan early?
• Are there any other fees I should be aware of?
• Can any fees be waived?

Repayments and loan terms

• What is the minimum and maximum loan term?
• Can I make extra repayments without penalty?
• Can I redraw from the loan if I’m ahead of my repayments?
• Is there a balloon payment at the end of the loan?
• If so, how much will this be?

Commission

• Are you being paid commission by the finance company?
• How does your commission get calculated and paid?
• How much more do you add to the interest rate to cover the commission?

Don’t be afraid to ask

• Is that the best deal?
• Can you throw in car mats, paint protector, rims, alarm, sunroof, spoiler, tinted windows etc for free?
• What’s the invoice price of the car?
• What’s the best trade-in price?