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Leasing as financing for a car
Zero-percent financing and similarly cheap offers
The advantage of a bank loan for car financing
Comparing car financing offers
In addition to the dealer and the manufacturer's bank, commercial banks are also an option for taking out a vehicle loan, especially since they sometimes offer discounted loans for financing a car.
For a car loan for a new or used vehicle, the financing bank in most cases requires transfer of ownership of the registration certificate part II — the former vehicle title — as security.
Security for car financing
In principle, it is also possible to use a simple consumer loan for car financing: in this case the bank does not learn the purpose of the loan and therefore does not require transfer of ownership of the vehicle registration certificate.
However, that document itself represents an additional security feature, so a bank can offer a recognizably vehicle-related loan at above-average favorable terms. In addition to loans in the strict sense, cars can also be financed via leasing or via a three-way financing arrangement.
Leasing as financing for a car
With leasing, the customer acquires the right to use the financed car during the leasing period, but not legal ownership. They pay monthly lease installments during the agreed usage period and return the car at the end of the agreed term.
Leasing is advantageous for companies and freelancers when the vehicle is used primarily for business purposes, since lease payments are generally recognized as business expenses.
Three-way financing for a car
Three-way financing combines the advantages of leasing with those of conventional loan financing. Characteristic of this form of vehicle financing is that the customer of the dealership can choose between three options at the end of the initially agreed term.
They can return the car, purchase it from their liquid assets or by taking out a loan elsewhere, or arrange financing of the purchase price with the original lender.
It is important in a three-way financing that the buyer does not state a mileage that is too low at contract signing, since the loan installments as well as the residual value of the car are largely calculated based on this figure.
If significantly more kilometers than agreed have been driven, the car’s residual value decreases, so the buyer must make an additional payment when returning the vehicle.
If the buyer takes over the car after the initially agreed usage period, the actual mileage is naturally irrelevant. The three-way financing also has three payment components:
The first component is the down payment at order or on delivery of the car, which can also be made by handing over a used vehicle.
The second component of the payments due under a three-way financing consists of the monthly loan installments, while the final installment or refinancing agreement or the vehicle return counts as the third part of the financing process. In individual cases some dealers offer three-way financing with no or a very small down payment; in such cases the monthly installments and/or the final installment are correspondingly higher.
Zero-percent financing and similarly cheap offers
Dealers often offer particularly attractive financing for selected models through the vehicle manufacturer's bank, which can include a zero-percent financing option. In such cases no interest is charged over the entire term.
Such interest rates are naturally unbeatable, but their use carries a risk. In most cases the captive finance arms of the manufacturers limit zero-percent financing or similar offers to models that sell below average or are to be replaced soon by an updated successor model. This results in an above-average loss of value of the vehicle and weak resale prospects.
Those who buy a model financed with a discounted car loan lose at least a significant part of their savings when reselling later. If, however, an acquired car is generally driven until the end of its useful life or passed on to the next generation, using special loan offers can actually save money. Offers with such conditions are rare in the context of car financing. They are more common in the furniture and electronics sectors.
The advantage of a bank loan for car financing
Loans for car financing from commercial banks almost always carry higher interest rates than loans from manufacturer banks. However, if you take the loan for a new car from an independent bank, you are perceived by the dealer as a cash buyer and can negotiate a significant discount on the vehicle price. This discount is often noticeably higher than the additional interest expense.
To obtain a discounted car loan, different banks require different special conditions; in particular for used cars many commercial banks impose a maximum vehicle age for applying their special car loan tariffs.
Buyers demonstrate the use of the loan for the vehicle purchase in any case by depositing the registration certificate part II with the bank financing the car.
Comparing car financing offers
Given the relatively large loan amount involved in car financing, a thorough loan comparison is essential. In addition to the effective annual interest rate of the offered car financings, prospective buyers should ideally also pay attention to further loan conditions.
The agreement to allow cost-free special repayments for the car loan if needed provides the option to repay the loan faster than planned. Even more important can be the entitlement to skip one monthly payment per year on request without the bank charging a fee for this service.
The nominal interest rate is also important in car financing, since it is used for recalculating the repayment after an early repayment or a payment holiday.
One should also balance the height of the monthly installments against the loan term. On the one hand, the installments should not consume the majority of income; on the other hand, the term for a new car loan should not exceed the useful service life of the vehicle.