Advice on choosing the right vehicle financing

By | March 30, 2020

Vehicle or vehicle financing can be realized through various known forms of financing. Today, however, not only is the cheapest form of financing in the foreground, but personal needs also determine the appropriate form of financing. How to find the right form of financing to buy the dream car

Whether leasing, installment loan or balloon financing – each of these vehicle financing shows its specific advantages and disadvantages, which, however, are also often a matter of interpretation. Financing for cars and the like always involves certain risks, but these can be significantly reduced by an intelligent and well-considered decision.

Leasing means hire purchase

Leasing means hire purchase

Leasing primarily refers to the use of leased property. It is, therefore, more about renting than buying. The real idea behind leasing is to pay a fee for the specified useful life, which is kept relatively short (2 to 5 years), and then to return the leased property to the dealer.

Options such as the purchase of the vehicle or the extension of the leasing contract are possible, but very few lessees actually use them. The majority want to benefit from young, current vehicles for a certain period of time and therefore only pay during the leasing period. A new leasing contract for another vehicle can then be concluded with the manufacturer or dealer who acts as the vehicle lessor.

Only commercial leasing offers tax advantages for business customers where the vehicle is considered part of the business assets. Large companies with vehicle fleets in particular benefit from low leasing rates, which, unlike buying, do not tie up any capital.

Leasing knows different types of contracts, usually a down payment or special payments are required. The monthly leasing rate remains constant. At the end of the lease term, the lessee returns the car. Depending on the variant chosen, e.g. kilometer leasing or residual value leasing, the lessee may still be charged for return if the maximum number of kilometers was exceeded or the actual residual value deviates from the calculated residual value.

Who is leasing interesting? Vehicle leasing is suitable for everyone who primarily owns a vehicle for use for a certain period of time and does not want to make an explicit commitment. You can change the vehicles practically at will and do not tie up any capital.

Installment loans enable early acquisition of property

Installment loans enable early acquisition of property

In contrast to leasing, the installment loan is chosen if the purchase and thus the ownership of the vehicle is in the foreground. The installment loan can be earmarked as a car loan or as a consumer loan without a specific purpose. The planning security due to fixed terms, an unchanged interest rate over the entire term and constant monthly installments make up the unbroken popularity of the installment loan for car financing.

The monthly installment decreases the longer the installment loan runs, but then the total cost of the loan also increases. A down payment is usually not required for the installment loan, but it can significantly reduce the amount of the installment and the duration and thus the total costs.

The installment loan as a car loan is available from every bank and also from the car dealer. However, this financing model is crucially dependent on whether it is a dealer financing or whether the loan is applied for completely independently from the house bank, a branch bank, a direct or online bank.

Anyone who goes from a manufacturer-independent bank to a car dealership with a loan that has been paid out can negotiate a hefty discount on the purchase price, which in the end can offer them even more savings than zero-percent financing from a dealer.

Direct banks and online banks also secure an advantage over car banks, branch banks, and house banks through attractive conditions. Low-interest rates, free special payments of any amount, installment breaks, no withholding of the vehicle letter, short notice periods are standard for internet banks today. Since the selection of offers is not exactly small, a comparison is worthwhile.

The installment loan has its clear advantages when it comes to durability and predictability, the loan amount is completely repaid at the end of the term, there is no high final installment and the car automatically becomes the property of the borrower.

However, it can also happen that the car suffers a total loss before the repayment expires and is therefore of no economic value. This is tragic, especially with very long loan terms, because you pay a long time for a vehicle that can neither be used nor sold. However, this risk always resonates and those who keep the terms as short as possible can also benefit from the overall costs.

Balloon financing with a high closing rate

Balloon financing with a high closing rate

Extremely low monthly rates over the entire term and a final rate that corresponds to the calculated residual value of the vehicle – balloon financing is often offered as part of dealer financing. It does not require a down payment and is intended for anyone who wants a very low monthly charge.

At the end of the term, the final installment is paid in one amount and the vehicle belongs to the borrower. Alternatively, follow-up financing can be considered if the final installment cannot be paid in one sum. If the balloon financing is designed as 3-way financing, the borrower also has the option of returning the vehicle to the dealer.

The crux of the matter for this financing for the car is the high closing rate and the risk that the actual residual value will not match the calculated residual value. This is why experts only advise on this financing if the final installment can be paid out of your own funds at the end of the term, be it through saved reserves or the sale of the vehicle.

A reduction in the residual value should also always be expected, this difference is to be paid with balloon financing as well as with leasing out of one’s own pocket. Follow-up financing means a new loan, usually an installment loan, which causes additional costs. The bottom line is that balloon financing can be much more expensive than an installment loan for the vehicle with equally high monthly installments over the entire term.

Carefully compare car finance deals

Conclusion: Every car buyer wants to save, but how much he can save with the respective form of financing, that’s a computing task that comparison computers do quickly today.

But it should be mentioned again that the cheapest offer for the individual does not have to be the best offer, because here too the proportionality between costs and benefits is important. That is why the important questions that everyone should ask themselves are: What are the priorities and what financial resources do I really have available for repayment?