To purchase a new or used car in most cases also includes the appropriate financing. Car buyers can choose between the car loan of an independent or the bank of the manufacturer. Car financing through an independent bank offers several benefits. Thus, consumers can choose among a large number of loans, the cheapest offer. There is also the chance of attractive cash discounts when buying a car. In order to make the vehicle purchase as cheap as possible, the different should be compared in advance exactly with each other.
Possible variants for a car title loan
Car financing differentiates between different forms. On the one hand, there is the earmarked installment loan and, on the other hand, the 3-way financing, which is also referred to as a balloon loan or car loan with a final installment. For this purpose, the purchase of a car can also be financed via a classic installment loan without earmarking.
Balloon financing – car loans for smaller budgets
In the case of balloon loans, the repayment is not made entirely during the agreed term, but within the framework of a larger final installment. The amount of the final installment corresponds to the vehicle value at the relevant time. As a result, the monthly burdens are between 20 and 50 percent lower compared to a normal installment loan. A down payment is usually not required for balloon financing. The amount of the rate thus only corresponds to the cost of wear and loss of value. For balloon financing, the duration is usually 36 or 48 months.
To extinguish the final installment for the car loan, the borrower has three options available. For example, the amount can be paid in one sum and the car can finally be bought. If the available capital is insufficient, there is the possibility of follow-up financing. This can optionally be completed at the same bank or any other financial institution. A 3-way financing in combination with a follow-up financing is in most cases significantly more expensive than an installment loan, Therefore, this variant should only be chosen if the final installment can be paid in one sum. This financing variant is very well suited if the borrower expects a larger cash receipt, for example from an investment or life insurance, during the term of the loan. Finally, there is also the option to return the car after the end of the term. In this case, balloon financing works much like vehicle leasing.
Car Loan as Installment Loan – The Classic
Financing via a installment loan is always appropriate if the vehicle is to be completely paid off at the end of the term. For example, the residual value can be used as a down payment for a new vehicle. Since the installment loan finances the entire purchase price, the residual value does not matter. This allows long terms of up to 84 months. If the useful life of the vehicle is similar, the monthly installments can be kept low due to a long service life.
Financing via an installment loan offers some advantages in vehicle financing. First, any loan can be used to buy a new or used car. This results in a large selection of offers from branch and direct banks. Through a precise online comparison can be found in a few moments, the cheapest loan. In the case of a loan without earmarking, the vehicle registration document does not need to be deposited as security. Thus, the vehicle can be easily sold during the term of the loan and this will be paid with the proceeds.
Here is an example calculation (valid for 2/3 of all customers, as of January 2019):
- The desired car costs 10,000 euros
- it should be paid back within 5 years
- the annual percentage rate is 4.71 percent
- the monthly rate is 186.94 euros
- 11216,20 euros must be paid back
Independent bank loan vs. dealer financing
Most car dealers offer their own car financing through the respective manufacturer’s bank. In most cases, this is a car loan with a closing rate, which looks unbeatable at first glance. In many cases, the auto banks even recruited a 0 percent financing. It is not surprising that many car buyers without further loan comparison opt for such a loan, especially since this also can not easily be concluded directly with the purchase. At a closer look, however, the car dealer’s credit often turns out to be a worse choice.
Advantages of an independent car loan:
- Independent car loans allow for cash discounts and additional extras.
- Quotes from dealers are often tied to specific models, which limits the choice of vehicles.
- Separate bank loans are not tied to a particular manufacturer.
- Installment loans offer more flexibility with special payments, installment payments and individual maturities.
- Registration certificate usually does not have to be deposited with installment credit.
Car buyers should therefore always compare several options before deciding on a particular financing.
What a zero-percent financing really costs
Car loans can vary greatly in price
In the application of vehicles, many manufacturers and car dealers point to favorable installment offers. Low monthly installments without additional financing costs should motivate motorists to buy certain vehicle models. In fact, however, installment payments always incur costs, even if interest is not charged on the financing. For zero-percent financing, these are already included in the purchase price.
In detail, the costs are in possible discounts, on which the buyer waives such a financing. With visually favorable interest rates, these often forego additional pre [/ su_list] negotiations. In addition, many car buyers underestimate their own creditworthiness and are happy to receive any installment payment. However, there are no differences between car dealers and banks in the guidelines for lending. This is primarily due to the fact that the financing is not handled by the dealer itself, but by a participating partner bank.
The list prices are set too high for almost all manufacturers, is no longer a secret. Thus, discounts of up to 20 percent when buying a car are not uncommon. However, as car dealers are often involved in 0% financing, there are no further discounts available.
At what discount is a bank loan worthwhile?
Even if the discounts are not maximum, an independent installment loan can certainly be worthwhile. For car buyers with an average credit rating, this is already the cheaper solution from a discount of around 10 percent.
Example of a car loan
For a vehicle with a purchase price of 20,000 euros, the monthly rate for a 0 percent financing is about 417 euros. Based on this offer, it can now be determined by means of a credit calculator, from which price reduction a installment loan would be worthwhile.
With an interest rate of 5.21 percent, a monthly installment of 417 euros can be used to finance a loan amount of 18,075 euros over four years. Thus, the cost would be the same for a discount of 9.6 percent for both variants. If higher discounts are possible, the installment loan would be the cheaper solution in any case.
Car loan: worth a residual debt insurance?
When concluding a car loan, most banks offer optional legal expenses insurance. Consumer advocates often criticize these offers as too expensive. In addition, in many cases not the existential risks but the creditworthiness would be protected. Again, a comparison may well be worthwhile. Because with fair conditions and a favorable tariff structure, a residual debt insurance can make sense.
Remainders are usually offered as protection against the risks of unemployment, occupational disability and death. In the event of an insurance claim, the policy will pay the monthly installments or, in the event of death, will pay the outstanding balance. Compared to other policies, the residual debt insurance is relatively fast. This is especially important for car loans with relatively high rates. It usually takes six months to pay for occupational disability insurance. If, for example, the borrower’s income goes away, it quickly comes to a financial shortage. Unemployment reduces income to about 60 percent of net income. In case of illness, only a significantly reduced sickness benefit will be paid after six weeks.
If the loan installments can no longer be serviced this will lead to the termination of the loan. The consequences are negative Private credit entries and a judicial dunning procedure. It should be noted that the cost of a residual debt insurance is not included in the annual percentage rate. Thus, the financing costs can be doubled by such a policy quite. A precise comparison is therefore recommended in any case. For car loans, it is also possible in the case of financial constraints to sell the vehicle. With the proceeds of the sale, the loan can also be replaced.
Special features of earmarked car loans
A dedicated car loan is tied to the purchase of a new or used vehicle. In addition to cars can thus be financed also motorcycles or RVs. To secure the loan, the registration certificate will be deposited with the bank as security after purchase. For this reason, earmarked loans are often offered at a cheaper interest rate. In addition, the chances for consumers with a rather weak credit rating to obtain a loan are easier. Some banks require a down payment on car loan to reduce the loan amount.
Correctly compare car loans
Regardless of which variant is used for vehicle financing, the offers should always be compared exactly. Already with the purchase of a small car so three-digit amounts can be saved. When comparing, the most effective annual rate has top priority. This contains not only the actual debit interest but also additional costs. In this way, the offered numerous banks can be compared at a glance.
Some caution is required with credit-based interest rates. These usually have a very wide interest margin. The often very favorable initial interest rate is only given to borrowers with a very good credit rating. In particular, this includes a high income and a Private credit report without negative entries. Car buyers with a normal credit rating should therefore opt better for an offer with a credit-independent interest rate.
Another factor that affects the cost is the duration. Car loans with longer maturities always mean a higher default risk for the bank. For this reason, the interest rates are usually slightly higher. In order to find the best individual offer, it is advisable to compare several terms with the car loan. Of course, when deciding on a term, the financial budget should always be taken into account.
Requirements for a car loan
Car loans generally have the same conditions as other loans. In addition to a regular and attachable income a clean Private credit information without negative entries is needed. For single people without maintenance obligations, the required income is between € 1,100 and € 1,500, depending on the loan amount and regular expenditure.
Who fears that his income is not sufficient, should apply for the loan together with a second solvent person. This increases the credit rating and with it the chance of a loan commitment.