Car finance guide
Despite the struggle for customers with increasingly tempting discounts and price reductions, a car is still one of the things in life that you can’t just buy on the side. A car loan is in many cases the only option, unless you want to save for years to fulfill your dream car dream.
A car loan is often portrayed as an overpriced purchase and cash purchase is the only way to get a cheap car. However, this is only half the truth, since a car loan, like any other loan, can be expensive, but does not have to be. There are a few things to consider here that decide whether you can still get a bargain with a car loan – or not.
Car loan or installment loan?
In addition to buying cash, two options can be used to buy a car: a car loan or an installment loan. The only difference between these two types of credit is that a car loan, like a home loan, is earmarked and an installment loan is not – this means that the sum from a car loan is only used to make the intended purchase for a car and the money is not used otherwise may. After the purchase, the bank receives the loan object as security, in the case of a car loan by handing over the vehicle letter.
The advantage of earmarked (auto) credit compared to the free installment loan is that the effective interest rate is significantly lower due to the provision of security of almost the same value and thus the loan is cheaper. In the case of a loan with a purpose limitation, the bank can simply resell the loan object in the event of a repayment failure, while the repayment failure without a purpose limitation would initiate a long and expensive seizure procedure from the bank’s point of view.
Where can I get a car loan?
You can get a car loan either from a car bank, a bank that cooperates with a dealer or another bank, because car loans are part of the core business of many banks due to the high demand – they even enabled previously unknown banks, the so-called car banks, to make a meteoric rise overnight, Car dealers or car banks like to refer to the car loan as car finance, but it is the same product.
Do dealers also give a car loan?
Contrary to a widespread view, dealers do not grant a car loan and have little or no influence on the issue. On the one hand, the economic risk for a merchant would be far too high for several credit customers, on the other hand, the latter ultimately lacks the financial infrastructure to be able to finally assess the creditworthiness of a customer.
Who offers the cheapest car loan?
It is very easy to determine whether a loan is cheap or not by directly comparing the effective interest rate. The lowest effective interest rate, especially as part of special promotions, can always be offered by auto banks of the manufacturers themselves, whose interest rate is sometimes close to 0%.
But: What else applies to a credit comparison does not count for car loans, because in this case the effective interest rate is based on 2 different credit bases, which significantly distort the result – because when using auto financing through a dealer, the discounts are significantly less generous, since you cannot use the cash payer discount.
Car loan through dealer or a third party bank?
This means that you have to finance the vehicle at a significantly higher amount than if you took out a car loan from another bank. In practice, you pay more interest due to the increased purchase price and the bank can then offer 0% financing to the outside, since the actual interest is hidden in the purchase price. In addition, there is the high brokerage commission for the dealer, which he receives for each brokered customer from the cooperating bank – the customer, of course, can also pay this through the higher price.
However, if you refused car financing through the dealer or his bank, the omitted dealer commission would lower the price as well as the possibility of a cash discount. In this case, you try to deal with the dealer as much as possible with the argument of paying the vehicle immediately, having your offer guaranteed in time (ideally in writing) and then asking for time to consider. On this basis, you can then go to your house bank or another bank and inquire about the terms of a car loan.
Financial difference – dealer credit and car loan in comparison
As an example: With a cash payer discount, discounts in financial form or in the form of free additional equipment (depending on the car brand and demand situation) of up to 20% and more can be negotiated – with a vehicle price of 40,000 USD, this would be a 8,000 USD discount or just one Vehicle price of 32,000 USD. Buying a car with dealer financing, on the other hand, rarely offers more than 3 – 5% (maximum 2,000 USD discount) and almost only in the form of the free additional equipment.
A car loan from another bank can thus be significantly cheaper: Even without a down payment for a car loan, where only the vehicle to be purchased can be provided as security, an effective interest rate of 5.5 – 6.5% with a total of 32,000 usual – but the loan costs would only be about 34,000 – 35,000 USD.
That means: Although the effective interest is significantly higher than with 0% financing from the dealer, you would still save several thousand USD!
The way to a cheap car loan
Usually, but not always, you get the best conditions from your house bank, however, numerous banks can now undercut their conditions due to their lower administrative costs due to the lack of a branch network. For customers with a good credit rating, loan interest rates of 2.5 – 4% are effectively not uncommon for a car loan of 40,000 – 50,000 USD – taking into account the example above, this would mean even greater savings compared to a dealer loan.
Car loan comparison factors
Some factors have already been mentioned, but in addition to the decision for a dedicated car loan instead of an installment loan and against a dealer loan, the creditworthiness of the customer and the type of protection for the bank are important. While it is seldom possible to have a strong influence on creditworthiness in the short term, the situation is different when it comes to hedging.
In the case of a car loan, this requires the mandatory deposit of the vehicle letter with the bank. Banks with a very low offered interest rate also require the vehicle to be covered by fully comprehensive insurance, so that the event of the vehicle being destroyed, and thus security, is also covered. If the bank does not insist on this on its own, you should offer this option yourself during the credit negotiations in order to additionally influence the condition negotiations with this argument.
Securing the car
Fully comprehensive insurance not only provides additional security for the bank, but also personal protection so that in the event of destruction it does not have to pay for a vehicle that is no longer available and also for a new vehicle, which usually has to be purchased as a replacement.
Residual debt insurance makes sense?
The residual debt insurance can also be requested from providers, particularly in the case of expensive vehicles – or can be brought into play as an interest-reducing factor in ongoing condition negotiations. In the event of death or loss of job, the residual debt insurance would instead of paying the borrower the payments still to be made, so that he or his heirs do not fall into the debt trap and thus represent additional security.
But: The residual debt insurance is a disadvantageous insurance for many reasons – it often only pays in the event of death and after an insurance period of at least 6 months, as well as if you lose your job. In the event of death, however, one could also take out insurance that is significantly cheaper in comparison, and a delayed or blocking hold of many residual debt insurance policies in the event of job loss is unfortunately not uncommon.
Disadvantages of car loans
Because the vehicle letter has to be deposited with the bank as security, the vehicle cannot be sold until it is paid off. The car loan must therefore be repaid before the bank issues the vehicle letter again.
In addition, each offer is always to be checked individually: In certain situations, a car loan from a car bank or a dealer can be significantly cheaper if the latter receives a special subsidy in which cash payer discounts or generous discounts are possible even if dealer financing is used. B. in low demand models, discontinued models or in a sales crisis of the manufacturer.
Beware of balloon funding
Most car loans from dealers are offered in the form of balloon financing, which is partly reminiscent of leasing. Only part of the purchase price has to be paid during the term and after the end the rest in the form of a large final rate, which is often 30 – 60% of the purchase price.
The trick: the customer is fooled into believing that the car can be bought very cheaply (“For just one USD a day!” Etc.) and only has to pay an extremely low rate – in fact, the customer is forced to pay separately, in addition to the rate save for the final installment if he does not want to go into debt at the end of the term to pay the final installment.