SUNDAY, APRIL 4, 2021 | Jessica L.
Car loan guide
Not all buyers can pay for a new car or a used car in good condition out of petty cash. For them, there is an earmarked loan that makes financing possible: the car loan. However, this occurs in different manifestations. Here you will find all the information you need to find the right procedure for your needs. A loan comparison is worthwhile to find the right loan for personal needs.
Essentially, two forms of car financing are distinguished: The earmarked installment loan and the 3-way financing, also known as car loan with final installment. The former differs from a classic loan in that the money provided may only be used for a single purpose, the purchase of a car. This has the advantage that the banks know that the money borrowed is matched by a certain countervalue on the part of the borrower - unlike a loan for a vacation, for example. The new car thus becomes collateral, which allows for a comparatively favorable interest rate.
You can apply for such installment loans in the traditional way at your branch bank, but they are also available as online loans. In any case, it is worthwhile to make a comparison using a loan calculator, as the offers vary greatly in terms of term, APR, fees, etc.
The alternative is the so-called 3-way financing. It is offered directly by car dealers, but now also by some banks. It is known as a car loan with final installment because of its procedure. The buyer initially pays a certain amount before making installment repayments - usually over a period of around three to four years. These are relatively low, leaving quite a large sum at the end of the period. This is also referred to as a “balloon”, and the procedure accordingly as “balloon financing”.
In the case of a car loan with final installment, the buyer has three options to proceed at the end: He can seek follow-up financing, settle the outstanding amount and thus buy the car for good, or he returns the vehicle. In the latter case, the car loan with final installment is similar to leasing. In combination with follow-up financing, 3-way financing usually turns out to be significantly more expensive than an installment loan. For this reason, you should only choose the car loan with final installment if you expect a larger sum of money during the term - for example, due to the payout of a life insurance policy - but want to benefit from low installments until then.
Advantages of an independent car loan over a dealer loan
Car dealers often cooperate with so-called car banks and offer their own financing. This is often a car loan with a final installment and usually the conditions seem unbeatably favorable. At first glance, no installment loan from the bank, no matter how favorable, can compete with the zero-percent financing offered by some dealers. In fact, however, the convenient dealer loan usually proves to be the worse choice.
The advantages of an independent car loan at a glance:
- With a car loan from the bank, acting as a cash buyer is possible - discounts and extras almost always outweigh the lower interest rates of the dealer loan in value.
- Dealer loans are often linked to a specific design, you deprive yourself of the chance to implement special requests.
- With a car loan directly from the dealer, you are bound to this one provider, with a bank loan you can compare among several offers.
- A bank loan is individually agreed, special payments, payment breaks and final installments can be negotiated.
Car loan vs. car leasing
Given the similarities between 3-way financing and car leasing, it stands to reason to consider the latter as a financing option as well. However, the big difference with a true car loan is that the car is leased, not purchased - although a purchase is not ruled out at the end of the lease period.
If the subsequent purchase of the car is planned anyway, a car loan is financially more favorable in any case. This is due not least to the attractive conditions that banks offer for this special-purpose installment loan. Those who are undecided can keep their options open with 3-way financing.
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