What you should know about car loans
It does not matter if your old car threatens to give up on the next ride or it’s finally time for your first own car – it must be a new one in any case. But then you already face the first big problem: How do I finance my new dream car? Because the money in the savings account is far from enough for the right model and the right equipment. Two-thirds of Germans are faced with this challenge and are now financing their new car through a car loan. We will tell you how to get the cheapest way to your dream car and what to pay attention to. See somethingincom.com for an illustration
Which financing option is the right one for me?
There are many ways to finance a new car without enough money on the high ridge. Looking for the new dream car beckons in the dealerships and dealers already the offers: Actions such as zero-percent financing and favorable leasing conditions seem very tempting. But what is behind it?
When financing with the dealer, the loan is usually given by a manufacturer-bound bank. Often the favorable conditions are subject to certain conditions – special models, certain equipment or short terms. There are two different options: On the one hand, regular financing can take place at constant rates, which are usually associated with a fairly high down payment on the purchase price, where it usually fails with little or no savings.
The other variant is a balloon financing. In this case, relatively low installments over the contract term are due and without or only with a small down payment. The remainder will then be due at the end of the period as a single final installment, the so-called balloon. Either you pay for it and pick up the car or take a rescheduling loan on the residual value of the vehicle. Partly, the buyer also has the opportunity to return the car to the dealer, but this case is rather rare.
The same applies to vehicle leasing: the new car is leased to the dealership for an agreed period of time, and a relatively low monthly installment is due. After the term of the lease, the car is usually returned to the manufacturer, but it can also, as in the case of balloon financing, be purchased by the lessee by paying the residual value.
Leasing offers a great advantage for people who are not sure about their choice of vehicle or want to change their car after a relatively short time. However, the use of the car and the corresponding rate of certain conditions is linked. The contract sets an annual mileage limit. If this mileage is exceeded, a relatively expensive additional payment is due, as the residual value of the vehicle is thereby reduced. In addition, only selected authorized repair shops are authorized for maintenance and repairs.
Despite zero-percent financing and low leasing rates, one argument in favor of a car loan from an independent bank is the bargain discount. If you can pay for your car at one go, you will usually receive a not insignificant discount on the purchase price. Because the manufacturer receives the money immediately, without the risk of default. Therefore, a discount of ten to 20 percent can usually be negotiated when purchasing. This means that the missing interest on a dealer financing is offset by a higher purchase price.
But what does that have to do with a car loan? The advantage of the independent car loan is that after conclusion of the contract, the entire loan amount is transferred to the desired bank account, you act as a buyer with it as a cash payer and thus benefits from the high discounts, the possible interest on the loan again. In addition, in contrast to the dealer loan, the down payment, since the entire loan amount including interest during the contract period is paid. The car loan is therefore an ordinary installment loan, which is bound to a specific purpose.
For which variant one decides at the end of course must be decided individually according to initial situation. In some cases, you can save more than with a conventional car loan, despite the casher discount through special promotions and offers from dealers.
Step by step to car loan
Before you finally choose your car loan and buy your dream car, you should think in advance some thoughts:
- How long do you want to drive your dream car?
- Which financing option makes the most sense for you?
- What are the offers and conditions for the loan in the market?
How exactly you best approach to find the best financing for yourself and your new car, learn here!
Step 1: Select a new car
Of course, first of all you are looking for your new dream car: Which model do you want to drive in the future? Which equipment must be available in each case? And of course, how much does the dream car cost in the end? Then it can then be decided whether there is any need for financial support through a loan. Advantage: With a car loan you can finance both a new car and a used car. Therefore, you must also determine how long it is planned to drive the car. After that, the term of your loan should also be determined.
Step 2: Check financial position
As a next step you should ask yourself how much money do you already have and what can you possibly already pay for. That means it’s time for a “cash fall”. Find out how much capital is available to you or whether you need to finance your dream car without a down payment. After that can be calculated well about the difference to the full purchase price of the car, how much to pay monthly. Are you even able to pay off so much monthly? Or maybe you should opt for a cheaper car or a different duration?
Calculate exactly your monthly income and expenses. Face it and see how much you have left at the end of the month. However, you should only invest a part of it in the financing of the new car, so as to ensure a financial buffer in the month.
Step 3: Decide on a type of financing
Then you should decide on a type of financing. This requires a bit of research work in the first place: who should finance your car loan? Mostly one has the choice between bank and dealer. To do this you should find out what interest rates are offered and whether possible actions bring even better conditions for the loan. Often, the dealers will be on site with better terms, but you should always compare the total price of the car and then decide which provider is eligible for the car loan. Meanwhile, the automakers also appear as lenders and offer another option. You can then use the in-house bank to finance your dream car directly from the manufacturer.
For one of the following financing options, you can decide:
- Classic car loan as installment finance
- Private leasing with right of use and final return of the vehicle
- Balloon financing with low installments and large final payment
- Three-way loan with down payment, low installments and final payment
Step 4: Compare offers
If you have decided on a type of financing, you should get and compare possible offers. Many car dealers and manufacturers offer attractive offers such as 0% financing and determine bonuses on different models or equipment ranges. However, you should always catch up on offers from your own bank and compare them with other loans. In particular, the car loan comparison is worthwhile online: By stating the purchase price, a possible down payment and the desired term, comparison portals show the monthly rate and the annual percentage rate. This should also be considered as a central benchmark when comparing with dealer and manufacturer offers.
Tip: It is also important to take into account the possible cash discount of up to 20%, which is usually omitted when financing through the dealer or manufacturer.
Step 5: Complete the loan and buy the car
When you have found the right offer, complete the loan. Meanwhile, comparison portals offer a relatively simple transaction and mediate between consumer and bank, so that the conclusion of the loan can easily be done online. You then have to prove your identity, either via the online function of your identity card or by post or video identification. If you make the loan directly with your bank, you must sign the contract with your client advisor on the spot. No matter which option you choose, the money will be credited to your account and you can buy your car.
Directly at the car dealer or manufacturer, the handling is even easier: you conclude your financing contract directly from the purchase and clarify all the necessary details with the seller in the dealership.
What requirements do I have to fulfill for a car loan?
Meanwhile, you can apply for loans relatively easy, especially for online loans, the requirements are relatively low. Of course, the conditions vary from bank to bank, but also for car loans as for purpose-based installment loans, one thing is required – the credit rating. It assesses how well or badly the borrower financially stands and how high the risk of a default is.
Basically, banks expect the following when lending:
- Residence and account in Germany
- An indefinite employment relationship outside the probationary period
- Sufficient, regular income
- Positive credit bureau score
Depending on the creditworthiness of the car buyer, the bank decides how high the interest rates will be and how long the term of the loan will be. Each bank has its own calculation, so it is worthwhile to compare loan offers of different banks and to look for a cheapest offer. Whoever does not feel like having time to run from bank to bank compares best via so-called credit portals. By stating the amount, the duration and the purpose of use, all offers can be compared. In addition, comparison portals allow you to benefit from additional special interest or bonuses.
Why are car loans cheaper than regular installment loans?
Anyone who has ever been informed about the financing of the new car, the comparison will have noticed that interest rates for a normal installment loan are significantly higher than for a car loan. The reason is quite simple: A car loan is purpose bound and the car purchased serves as additional collateral for the bank. This means that the bank will become the actual owner of the vehicle until the last installment has been paid. The borrower can not continue to sell the car, but already use it. The advantage for the bank is that it can make the car in case of default, even the car into money and so the balance is paid.
As a borrower, you have to prove that the money was really used for buying a car. Usually, the vehicle registration document, ie the registration certificate II, is deposited with the bank for the period of vehicle financing and a transfer by way of security must be approved. From time to time, the bank will also need a copy of the purchase agreement.
What you should pay attention to the amount of car loan is that this is not too far above the value of the vehicle to be purchased. This gives an independent estimate of the residual value of the car, which varies depending on the model, equipment and condition. For this purpose, a variety of data from car exchanges, classifieds and information from car dealers are compared in order to create an approximate comparison value. Important for the bank is that the car is not too old. Because it is the older the vehicle, the less it is most likely worth, which means less security for the bank. For this reason, a possible car loan could be rejected. Of course that does not mean that you can not finance your new car with a regular installment loan.
What do you have to consider after closing the loan?
It is not enough to choose the right loan provider for your new car: even after the loan has been completed, there is still a lot to do!
As with any other loan, you also have a 14-day right of revocation for car loans, which the bank must clearly state when concluding the contract. This can be very important if, for example, the purchase of a car by a private dealer explodes or personal plans change in the short term. Once the loan is no longer needed, you can avail of this right of withdrawal and do not sit on the loan.