Are You Overpaying with Dealer Financing?

Imagine this: You’re at a sleek car showroom, admiring your dream ride. The dealer leans in with a friendly smile and says, “Why not finance it with us? We offer in-house loans too.”

Sounds convenient, right? But is it really the best financial move? Let’s break it down.

In This Article:

✔ What in-house car financing is
✔ Why dealerships offer it (and their true motivations)
✔ Why buyers opt for it
✔ The hidden downsides of in-house loans
✔ How it compares to bank financing
✔ Alternatives to consider

Let’s get started!

What Is In-House Car Financing?

In-house car financing (or dealer financing) means the dealership itself provides the loan for your car purchase. Instead of securing a loan from a bank, you borrow directly from the dealer or their affiliated finance company.

It’s a one-stop shop—you get the car and the loan from the same place. Typically, this is structured as a hire-purchase agreement, where you make monthly payments to the dealer until the loan is paid off.

It’s easy and convenient, but as we’ll see, convenience can come at a price.

Why Do Dealers Offer In-House Financing?

Car dealers don’t just make money selling cars—they profit from financing, too. By providing loans, they earn from interest rates and fees, boosting their overall profits.

Two Key Reasons Dealers Push In-House Loans:

1. Higher Interest = Higher Profits

    

   • Dealers often mark up interest rates above what banks offer. This extra interest goes straight into their pockets.

      

2. More Flexible Lending Rules

    

   • Banks in Singapore follow strict Monetary Authority of Singapore (MAS) rules, limiting car loan amounts to 60–70% of the car’s price and capping loan tenure at 7 years.

      

   • In-house financing often bypasses these restrictions, allowing buyers to take larger loans or even 100% financing.

      

So while it might seem like they’re doing you a favor, the reality is—they’re maximizing their profits.

Why Do Buyers Choose In-House Financing?

Despite the potential downsides, many buyers still opt for dealer financing. Here’s why:

1️⃣ Lower (or No) Downpayment

Bank loans require 30–40% downpayment due to MAS regulations. On a big-ticket item like a car in Singapore, that means paying tens of thousands upfront.

Dealer financing, however, often offers:
✔ Lower downpayment requirements
✔ 100% financing (in some cases)

This makes it appealing for buyers who don’t have enough cash on hand.

2️⃣ Easier Loan Approval

Banks can be strict with loan approvals, especially if:
❌ Your credit score is low
❌ Your income is irregular
❌ You already have existing loans

Dealers, on the other hand, are often more lenient, as they want to close the sale. But this flexibility comes at a cost—higher interest rates.

3️⃣ Faster & More Convenient Process

Getting a bank loan takes time—you need to apply, submit documents, and wait for approval.

With in-house financing, everything is done on the spot. You can pick a car and secure a loan in the same afternoon, making it a hassle-free experience.

4️⃣ Exclusive Dealer Promotions

Some dealerships offer discounts, free accessories, or servicing packages—but only if you take their loan.

While these perks sound attractive, it’s crucial to calculate the total cost to ensure you’re not paying more in the long run.

The Hidden Downsides of In-House Financing

While in-house financing has its advantages, it also comes with significant drawbacks.

❌ 1. Higher Interest Rates = Higher Costs

Dealer financing almost always comes with a higher interest rate than bank loans.

💰 Example: Toyota Corolla Altis 1.6 Standard

👉 That’s over S$50,000 more just in interest payments!

❌ 2. Bigger Debt Burden

A low or zero downpayment means taking on a larger loan, which translates to:
🔺 Higher monthly repayments
🔺 More interest paid over time
🔺 Increased financial strain

A larger debt also affects your ability to qualify for future loans, like a mortgage.

❌ 3. Risk of Negative Equity

Cars depreciate quickly, and if you finance the full amount, you could end up owing more than the car’s market value—a situation known as negative equity.

🚨 If you need to sell your car before finishing the loan, you might still owe money after selling the car!

❌ 4. Limited Loan Flexibility

With in-house financing, you’re often locked into the dealer’s terms. Some dealers restrict early loan settlements or charge penalties for refinancing, making it harder to switch to a better loan later.

❌ 5. Unregulated Lenders & Higher Risk

Unlike banks, some dealership financing arms aren’t regulated as strictly. If something goes wrong (e.g., the dealer shuts down), your loan terms might be at risk.

What Are the Alternatives?

Before locking yourself into dealer financing, consider these better options:

✅ 1. Bank Car Loans (Best for Lower Interest)

✔ Lower interest rates (2.2%–2.8%)
✔ Regulated by MAS (better consumer protection)
✔ More transparent terms

💡 Tip: Compare bank loans using MoneySmart’s car loan comparison tool to find the best rate.

✅ 2. Licensed Finance Companies

Some finance companies offer car loans at rates between bank and dealer financing. These can be worth exploring, but always choose licensed, reputable lenders.

✅ 3. Save for a Bigger Downpayment

If possible, delay your car purchase and save for a larger downpayment. This allows you to:
✔ Qualify for a lower-interest bank loan
✔ Reduce your total loan amount
✔ Avoid excessive debt

✅ 4. Car Leasing or Car-Sharing

If car ownership costs seem overwhelming, consider leasing or car-sharing instead. This eliminates loan-related debt while still giving you access to a car when needed.

✅ 5. Loan Refinancing (If You Already Have a Dealer Loan)

If you’ve already taken an in-house loan, check if you can refinance with a bank later. Many loans allow early settlement with some penalty fees, but the savings on interest might be worth it.