Many consumers who buy a new car or a higher quality used vehicle need a loan to finance it because they do not have sufficient reserves.
As a rule, loan amounts of several thousand USD are used for such a car loan, with very expensive cars, car buyers also ask for loan amounts of over 20,000 USD. Car loans can be used to finance vehicle purchases as conventional annuity loans or as a loan with a final installment.
Installment loan as a car loan
A car purchase loan is very widespread, and its repayment terms are similar to those of a conventional consumer loan. After the loan amount has been paid out, the customer pays the same amount for the repayment and the current interest every month.
The proportion used for the repayment is continuously increasing. The interest burden is continuously reduced because the residual amount to be interest continuously decreases due to the repayments. The interest rate for this car loan is fixed throughout the term, so that the customer is not exposed to any interest rate risk.
Before an installment loan is paid out as a car loan, the customer’s creditworthiness is thoroughly checked. For this purpose, extensive questionnaires must be filled in, in which information on the economic and personal circumstances of the borrower must be provided. Among other things, the marital status, the profession exercised and current employer, the amount of current income and the regularly recurring monthly expenses are to be stated. The information on income must be regularly backed up with the latest salary slips.
In addition, it is common for the lending bank to obtain information from Credit Bureau. The bank will only grant a loan if the information on the financial situation and a positive notification from Credit Bureau confirm the customer’s creditworthiness. A car loan is always paid out with a strict earmarking.
For this reason, the loan amount may only be used to finance the intended vehicle purchase. One of the special features of a car loan is its collateral. As a rule, the bank is to be given the Kfz letter to carry out the transfer by way of security agreed in the loan agreement.
As soon as the borrower does not transfer the monthly installments for his car loan to the bank in accordance with the agreements in the loan agreement, the bank can have the vehicle picked up. The car is then sold to use the proceeds to redeem the loan.
Final installment loan as a car loan
It is much less common for customers to opt for a final installment loan to finance the car purchase. This form of loan is a final loan that is only repaid at the end of the term.
This implies that until the end of the loan term, only the current interest has to be paid by the customer. For this reason, this type of loan is expensive compared to the usual installment loans for financing the car purchase. Interest accrues for the entire loan amount during the term, resulting in a significantly higher total amount than for installment loans.
Risks in the final installment loan
In addition, a loan with a final installment as a car loan is also associated with specific risks. In order to be able to reliably pay the final installment at the end of the contract period, it is necessary to save larger amounts over the entire term. If this does not work and the final installment cannot be paid, then either a new loan has to be taken out or the car has to be used.
With this special form of credit, the borrower’s creditworthiness is checked in the same way as with a conventional installment loan. In terms of earmarking, fixing the interest rate over the entire term and securing the loan by providing the vehicle letter, there are no differences to installment loans for the financing of cars.
Lender for car loans
Customers are usually offered a loan to finance the purchase of a car from a car dealer during the sales talk. These loans are usually issued by the automotive group’s own bank. The car salesman acts as a credit broker, he informs the customers about the loan terms and helps them fill in the necessary applications.
Although the interest rates for this type of car loan are usually extremely cheap, experts usually advise against car loan loans. As a rule, the customer no longer receives a significant discount on the purchase price of the vehicle when the loan is drawn. This price disadvantage cannot be compensated for by low interest rates.
Consumers can also obtain a car loan from established banks and savings banks. Online banks from home and abroad also offer loans to finance vehicle purchases. The application for and processing of the loan takes place over the Internet and does not require any special expertise on the part of the customer.
Comparison of interest rates
When choosing a car loan, the customer first decides on an installment loan or a loan with a final installment. After that, the optimal loan term is determined, which allows the borrower to repay the car loan without difficulty.
Customers then check the loan offers from different banks. It is always important to pay attention to the effective interest rate, because only this interest size takes into account all factors that have an impact on the amount of the total credit costs. In the case of the effective interest rate, for example, transaction fees and different interest and repayment dates are appropriately included in the calculation.
The borrower’s credit rating also has a significant impact on the amount of interest charged by the bank. The better the rating of the customer’s credit rating, the lower the required risk premium and thus the overall interest rate. To get an overview of the current interest rates for car loans, many consumers use comparisons on special Internet forums or in specialist magazines.