Today, used cars are hardly ever paid for in cash, but almost always financed. On the one hand, this is due to the high amounts that used cars can still cost. On the other hand, it is because the interest on loans is so moderate that financing is worthwhile for many customers.
Most banks give loans for the purchase of used cars to their customers with appropriate insurance. But bank credit is not always the cheapest way to finance a used car. Before buying a used car, the borrower should find out about the options available, so a borrower can protect himself from paying more than necessary to buy a used car.
There are special credit institutions on the credit market that specialize in car financing. These mostly work with used car dealers and also with online used car dealers. But other credit institutions also issue so-called consumer loans, which are intended for larger purchases such as kitchens or private cars.
Different loan models
There are several loan models, especially when buying used cars, although there is still the well-known installment loan. With this model, the customer borrows a certain amount, which is then returned in fixed monthly installments. This standard form of credit is popular with many customers because they can calculate exactly what monthly charges they will face. However, the interest rate on these loans is rarely cheap compared to other alternatives.
Most private customers also know the possibility of car leasing. With this type of loan, the customer makes a down payment, repays monthly installments and pays a transfer fee that results from the residual value of the car. As a rule, however, a car leasing contract for private individuals is overpriced and should be used by business people because they can use the costs for tax purposes.
Review new forms of credit before closing
If you are interested in a car leasing contract, you should carefully calculate the costs. Car leasing is usually advertised with favorable rates and a low down payment. However, the transfer fee is very high and there is a great risk if the residual value of the car does not match the list price. The lessee is also fully liable for the theft or a total loss caused by the lessee. These disadvantages should definitely be included in a calculation.
The three way loan
A new form of used car loan is the ‘ three-way loan ‘. A ‘three-way loan’ is similar to a car leasing contract, but once the contract expires, it gives the customer the choice of how to proceed with the car. The customer can return the car, pay a transfer fee or continue to finance. These very flexible contracts are primarily offered by auto banks. House banks are often the alternative. These advertise their customers with a relatively low interest rate.
In practice, it often turns out that the monthly rate is quite high due to a short term and therefore less money is available to a household. A lower rate can only be achieved by a very long runtime. A high down payment is also required from customers. But the financing of a used car does not have to be through a house bank.
There are other credit institutions that are interested in financing used cars. It is definitely worthwhile for the borrower not just to ask your own bank for a loan, but to find out about alternatives beforehand. This can save considerable costs for the monthly installments or negotiate better contract terms.
There is also the option of borrowing money from private individuals for interest. There are portals for borrowers on the Internet that bring them into contact with lenders. So if someone wants to have a car financed, they register there. It describes what he wants to use the loan for and how much money he needs to buy the used car.
There are also investors on the portal who want to lend their money for interest because they get higher interest income there than at the house bank. Either a lender or multiple investors can use the project at a fixed rate for mutual benefit.
Balloon credit: mostly high completion rate
Some car loan banks offer their customers a so-called balloon loan. This can be compared to the ‘three-way loan’. However, the customer has only two options to choose from at the end of the term. Either he pays a very high closing rate or he finances the car again.
Another form of car leasing is kilometer leasing. If you want to finance a used car through kilometer leasing, the advantage here is that the car has already lost a large part of its value. The customer gets it with a low calculated down payment and a rather low monthly rate. However, the car does not come into its possession after the contract expires. If the car also has defects that are not covered by normal wear and tear, this loss is compensated for by a high additional payment, which the customer must make in addition.
Advantages and disadvantages of forms of credit
The advantages of kilometer leasing are that the customer does not finance the car, but only pays for its use. He pays low installments and is usually contractually granted many conditions for using the vehicle. The customer also pays a small down payment. However, if he drives more kilometers than agreed, he has to pay for it. He is not liable for the residual value of the vehicle. A kilometer lease is worthwhile for those customers who would rather lease a car than take out an installment loan for it. This type of leasing proves to be cheaper and more common than an installment loan.
So-called residual value leasing, which generally means car leasing, is basically not worthwhile for many private customers, since the risk is too great that they have to pay high residual value compensation. This form is aimed at business people who have tax benefits from car leasing.
The advantages of a balloon loan are, above all, the low installments and a fixed interest rate. This is contradicted by the fact that the balloon loan gives the customer only two options and that the closing rate can be very high. A borrower who chooses this form of credit should never lose sight of his own financial situation. Basically, a borrower should ask for a 3-way loan instead of the balloon loan.
The classic installment loan is often offered
Since hardly anyone buys a used car for cash, the classic installment loan is one of the common financing models for used car buyers. Many car dealers are now granting an interesting discount on used cars and despite financing, which the borrower should use. You are usually offered discounts from the list price, which can be both cash discounts, but also in kind as a higher quality equipment.
But before that, a car buyer should always ask himself whether it is important for him to own the used car after the contract expires. In this case, it is advisable to choose an installment loan, because here the vehicle becomes the property of the vehicle after the contract expires.
Those who do not seek ownership rights should consider the cheaper financing models such as the ‘three-way loan’. The costs of financing are cheaper here than with a classic installment loan and the buyer has three options after the expiration of the contract, how he wants to proceed with the car.
Even a car financing test showed that paying cash for the customer was more expensive than financing, even for new cars. Even here, the price of the financing model was lower than the price of cash. The ‘three-way loan ‘ proved to be even cheaper. Most car dealerships have specialized in classic installment loans, with several banks offering different offers.