Loans for car purchase – how to find the best financing

For most people in germany, buying a car is on the agenda at regular or irregular intervals. In many cases, at least part of the purchase price must be financed. Many car buyers trade in their current vehicle at the dealership and can still pay part of the purchase price out of their own funds. The difference must then be financed, for example through an installment loan. However, there are other ways in which you can obtain auto financing. Therefore, in our article we would like to take a closer look at what kind of car purchase loans and other types of financing are available, which you can use to purchase a new or used car.

More than 30 percent of all vehicles are at least partially financed

It is no longer unusual for a car to be bought at least partly on credit nowadays. Statistics show that more than 30 percent of all purchases of used and new cars now require financing of at least part of the corresponding purchase price. Thus, in principle, the car is the consumer good with a value of more than 10.000 euro, which is the most frequently financed.

In the following sections of our article, we would like to discuss the financing options that are generally available to you. There are essentially two groups of providers, namely banks on the one hand and the car dealers themselves on the other. In summary, these two groups provide the following financing options for you to choose from if you are looking to finance your new vehicle in the near future:

  • Installment loan
  • Car loan
  • Installment agreement with the dealer (classic dealer financing)
  • Three-way financing
  • Leasing

Installment loan: flexible loan also for car financing

Many car buyers who need to finance at least part of the purchase price of their vehicle spontaneously decide to take out an installment loan. This is in fact very flexible, as it is usually not necessary to specify a particular use. Thus, installment loans are traditionally universally applicable. The installment loan must be applied for at a bank. Before doing so, however, it is advisable to compare the conditions due to the wide range of offers available.

Despite the current turnaround in interest rates on the market, there are still a number of banks that offer installment loans at a comparatively low interest rate. Average interest rates currently range between 3.9 and 6.9 percent. The great advantage of the installment loan is above all that it is external financing. This means that you do not arrange the financing through the dealer, but through a credit institution. This in turn leads to the advantage that you are a cash payer vis-A-vis the dealer. If you go to the car dealer as a cash buyer, you still often get a discount, the so-called cash rebate.

The cash discount means that, for example, you do not have to pay an original purchase price of 20.000 euro, but with an assumed discount of 15 percent, you will only need to pay 17.000 euro. Since this reduces the amount of credit required, you save on interest and the monthly payment is also lower. This in turn can lead to lower costs when taking out an installment loan and claiming a cash discount than with dealer financing, even if the car dealer may even offer a slightly more favorable interest rate. Exactly for this reason, when comparing financing offers, you should always take into account that a discount in the form of a cash rebate is possible.

When deciding between dealer financing and the installment loan from the bank, you should always keep in mind that you can only act as a cash payer at the dealer if you take out external financing. If the difference in interest rates is relatively small, the cash discount may mean that you are more favorable than with dealer financing, despite the slightly higher interest rate charged by the bank.

Car loan: special variant of the installment loan for car financing

A second financing option, which has a lot in common with the previously mentioned installment loan, is the car loan. In principle, this is a special installment loan that is simply used for car financing 1 credit offers and all information for your car purchase – https://www.Test.De/autofinanz-der-beste-weg-fuer-sie-4502536-0/ – retrieved on 18.09.22 is thought. Some banks offer such a car loan, sometimes in the form of a distribution channel via automobile clubs such as ADAC.

With a car loan, you take out the corresponding loan and then pay back the loan amount plus interest in monthly installments. In most cases, you have to provide collateral for a car loan, namely in the form of the transfer of ownership of the vehicle as security. Unlike installment loans, auto loans are earmarked for a specific purpose and can only be used in the context of car financing.

Classic dealer financing: installment agreement with the car dealer

The two financing alternatives mentioned above refer exclusively to banks that provide either an installment loan or a car loan. Alternatively, most car dealers now offer two or even three alternatives, namely:

Let us first take a look at traditional dealer financing. This is nothing more than an installment agreement with the car dealer. This means that they have to pay the purchase price of, for example, 18.000 euro to be repaid in monthly installments thereafter. Here, too, an interest rate is usually added. However, the offers made by car dealers or. Car banks often slightly cheaper than the interest rates they have to pay for an installment or car loan.

At this point, I would like to point out once again that you should include the cash discount explained in detail above in your calculations. The classic dealer financing is therefore that no loan amount is paid out to you, of course, as is the case with an installment loan. Instead, simply pay the purchase price in monthly installments. Typical conditions, as they are currently found in many dealer financings, look as follows:

  • Interest rate: 2,9 to 4,9
  • Term: 36 to 60 months
  • Average monthly payment: 150 to 350 euros

Over the term, of course, they can adjust the conditions accordingly. If you want to pay a slightly lower monthly rate, simply choose a correspondingly longer term.

Three-way financing: balloon financing as a modern alternative

More and more automotive dealers are not only providing their customers with the classic dealer financing explained above, but are also offering so-called three-way financing as an alternative. This is often referred to as balloon financing. What's behind it? The name balloon financing means that the final installment for this type of financing inflates like a balloon. This refers to the final installment, which is significantly higher than the previous monthly installments in the case of three-way financing. The purpose is that the previous installments can be lower due to the quite high loan installment, so the customer has to bear a lower monthly charge.

The term three-way financing comes about because the car buyer can usually choose between three options at the end of the term, namely:

  1. Returning the vehicle to the dealer
  2. Payment of the final installment
  3. Follow-up financing

Few car buyers probably choose the first option and return the vehicle to the dealer because they almost always want to become the owner of the car. Therefore, the first option could be compared to car leasing, where it is common to return the car to the dealer at the end of the leasing period.

Significantly more often, the second option is chosen instead, namely to pay the final installment. This means that the car buyer then becomes the sole owner of the vehicle. This transfer of ownership will be postponed somewhat in the case of the third option, namely follow-up financing. This is usually chosen if you cannot afford the payment of the final installment from your own funds. Then, in principle, you take out a new loan or extend the dealer financing, so that the transfer of ownership can then take place, for example, a year later.

Three-way financing is a good choice, especially for car buyers who want a low monthly payment. In addition, it is suitable provided that you would like to have the choice at the end of the term whether you actually buy the vehicle permanently or return it to a dealer. Basically, balloon financing is a kind of weakened leasing, but on a credit basis.

Vehicle leasing: an option for business owners

Towards the end of our article, we would also like to briefly discuss car leasing, because this is of course also one of the financing options that can be used for car financing. For private customers, however, leasing is usually less interesting because it is usually more expensive in total than taking out a car loan or the classic type of dealer financing. Instead, business people in particular benefit from car leasing as a financing option, because the leasing installments can be claimed as business expenses for tax purposes.

Basically, car leasing as a financing option can be characterized by the following advantages:

  • Moderate monthly charge
  • Driving the latest type of vehicle at regular intervals
  • Tax deductibility of lease payments (for professionals)

Which is the best financing for me??

Now let's answer our initial question, which is what is the best financing for the car purchase?. Generally, there is no one financing option that is ideal for all car buyers. Therefore, you should make your decision dependent on several criteria in order to find the most suitable car financing for you personally. Ask yourself the following questions, among others:

  • How important is a low monthly payment to me??
  • Would I like to have everything from one source?
  • How much flexibility do I want within the financing??
  • Do I use the vehicle for private or business purposes??

These questions will help you find the right financing solution for you. If, for example, the lowest possible monthly payment is important to you, then three-way financing and vehicle leasing are particularly suitable. If you want to remain very flexible, this also applies to balloon financing, but of course also to an installment loan or car loan, which you can also repay to the bank early at any time.