Forms of auto loan
A car loan can be taken out in different ways. On the one hand, this is the classic installment loan, on the other hand, car buyers can also take out the balloon loan or 3-way financing. Each of these variants offers both advantages and disadvantages, which is why the conclusion should be carefully considered.
Car loan as a classic installment loan
If the car loan is taken up as a typical installment loan, the purchase amount for the vehicle minus any down payment that may be required is fully financed. The monthly rate is calculated here according to the purchase amount and the loan term. At the end of the term, the loan amount is fully repaid to the bank, so the borrower is free of debt. This loan option is very suitable for car buyers who want to use their vehicle for the long term.
Balloon financing – final installment loan
As an alternative to this, the car banks in particular also offer the balloon or the final installment loan. With this loan, the purchase amount for the vehicle is not fully financed, but there remains a remainder at the end of the term. This remainder, also known as the final installment, must then be paid in full at the end of the term. If it is not possible to fully settle the outstanding amount, many car banks also offer further financing of the loan amount. The interest for further financing will then be agreed when the balloon loan expires.
Advantages of balloon financing with a final installment
Since the entire loan amount is not financed, the balloon or final installment loan has the advantage that the monthly installments are significantly lower than with the “classic” car loan, which is why this loan is particularly worthwhile for people who have a low income, but still want or need to drive a new car. However, the final rate must also be calculated at the end. If it cannot be paid in full, further financing will be required so that further interest costs will also be incurred.
3 way financing
The third model of car loans is 3-way finance. This Aotocredit is also a balloon loan. At the end of the auto financing period, borrowers then have three options as to how to deal with the outstanding amount. On the one hand, it is possible, as above, to pay the final installment in one amount, and further car financing can also be agreed.
As a third variant, the car banks also offer to take back the vehicle in order to pay the loan with the proceeds. In this case, the car loan is comparable to leasing and is particularly suitable for people who want to drive a new car regularly.
Interest on car loans
Car loan is an important offer for banks, because statistics show that between 60-80% of all car buyers finance their new vehicle. So if you offer a cheap car loan, you can secure the favor of the customers.
For this reason, a car loan is often offered at lower interest rates than a classic installment loan. On average, the providers calculate between 2-5% pa . Only the special offers of the car banks lure in part with even more favorable conditions. However, these are supported by the manufacturers in order to inspire even more customers for such a new car.
The low interest rates on car loans can also be maintained because the loan is secured by the vehicle being transferred as security (delivery of the vehicle letter to the bank) and the risk of default is therefore lower.
Anyone who uses a “normal” installment loan for vehicle financing must therefore also pay standard terms of 3-7% pa.
Car loan protection
If the car loan is taken out from a car bank, they usually require the vehicle to be assigned as security. In the case of transfer by way of security, the car bank remains the owner of the vehicle, while the buyer is allowed to use the car and is also responsible for securing it.
Sale of the car before repayment of the car loan
In order to prevent the early sale, the vehicle registration document will be retained by the car bank and will only be handed over again when the loan has been repaid in full. Of course, this has disadvantages in the case of early sales, because a sale is not possible without a vehicle letter. Therefore, borrowers must ask the bank to issue the vehicle registration document before the desired sale. However, this will often only be possible step by step by transferring the outstanding loan amount.
Direct banks waive the protection
In contrast to car banks, direct banks often do not secure their car loans. They do not request a motor vehicle letter , since the expenditure for collateral management is comparatively high for them. You give the car loan, but blank. Of course, this gives the borrower a lot more freedom, because an early sale of the vehicle is possible at any time , even if the loan has not yet been repaid in full.