Why finance a new car?

New car financing has become indispensable in the car market. After buying a house or an apartment, a car is usually the second most expensive purchase in a consumer's life. As with purchasing real estate, car purchases involve larger sums that the average consumer rarely has available in cash. That is why only about one in three new cars is paid for in cash and two-thirds of new car buyers rely on new car financing.

If a car buyer cannot cover the purchase price from available personal cash, new car financing is an option for buying the new vehicle. There are various reasons why buying a new car with a loan offers the car buyer economic advantages.

Many people need a particularly reliable car to maintain their job and secure their income. An older vehicle is often no longer reliable, and as the vehicle ages it becomes increasingly expensive to finance repairs and maintenance. Once a certain point is reached, it is often less economical to keep an old vehicle in good technical condition than to purchase a new vehicle, which requires few repairs and also provides free maintenance services through warranties.

From the customer's perspective, it is also an advantage to be able to present oneself to the dealer as a cash buyer. A cash purchase is particularly advantageous for a car dealer: they only need to complete the sale, save the effort of arranging a loan, and may possibly receive a sales bonus from the manufacturer. Accordingly, dealers often grant cash buyers a good discount on the list price.

Common financing types for new cars

Several typical financing types have emerged for new car financing that address different situations of the new vehicle buyer or user.

If a new car financing arrangement is organized through a lease agreement, the financier acts as the purchaser of the vehicle and allows the actual keeper of the vehicle, the lessee, the temporary use of the vehicle for the duration of the lease. This makes the user of the new car the possessor of the car but not the owner. In a lease agreement, that ownership role remains with the lessor. When the lease expires, the user must return the vehicle to the financier. Lease payments are usually billed on a per-kilometer basis.

Unlike leasing, new car financing via a loan works differently. The loan is paid by a financier to the borrower, who uses the loan amount to settle the purchase price of the car with the dealer. In this way, the keeper of the vehicle also becomes its owner, while a loan agreement exists between the financier and the car buyer. Loans to finance new car purchases are generally offered at fixed interest rates. In combination with fixed repayment installments, this results in fixed, usually monthly, payments from the borrower to the financier.

Partners for new car financing

There are several types of financiers for new car purchases that offer different forms of new car financing. They can be divided into two major groups: manufacturer-affiliated car financiers and independent financiers.

Manufacturer-affiliated car financiers are almost always bank subsidiaries of car manufacturers. Other financiers operate legally independent of car manufacturers. These include financial institutions such as universal banks that offer various types of loans. Other financiers specialize in the leasing business or in loan financing for new cars. It is also possible for such independent financiers to specialize in specific car brands, exclusive sports cars, or motorhomes.

Credit assessment for new car financing

To decide on granting a loan and to set the terms, the financier conducts a risk assessment. The car to be purchased must retain value, including when considering depreciation over time.

If the borrower, for whatever reason, stops making payments, the car must be disposed of and the sale price achieved should, as far as possible, cover the full outstanding balance. A car that loses value quickly therefore represents a higher risk than a particularly value-retaining model. In the event of a total loss in an accident, a car can no longer serve as collateral because it then has almost no value. To protect themselves against the risk of a total loss in value due to an accident, car financiers therefore often require the taking out of comprehensive insurance when the borrower does not provide other collateral for such cases.

In addition, the lending institution also checks the borrower's financial ability to make the ongoing interest and repayment installments. This security is greater the higher the borrower's income is and the less likely it is that the borrower will, for example, lose that income through termination of employment. Income from civil servants is therefore considered particularly secure, since their employment contracts are virtually impossible to terminate.

Legal aspects of new car financing

So that the vehicle can serve as collateral, loan agreements usually include the so-called transfer of ownership of a vehicle as security to the financier agreed with the borrower. With such an agreement, the owner has indeed handed the vehicle over to the financier as collateral, but may practically use the vehicle without restrictions as long as the agreed loan installments are paid. Only when these installments are wholly or partly not paid does an agreement on the transfer of ownership as security allow the financier to directly access the pledged vehicle.

For loan agreements to finance a new car purchase, this security mechanism also means that the owner and keeper can no longer sell the vehicle without the financier's consent. Depositing the vehicle title (KFZ-Brief) with the financier is sufficient for this, because without this document a vehicle cannot legally be sold properly in Germany. If a sale is planned, the borrower and vehicle owner must therefore request the vehicle title from the lender. The lender can then agree on a procedure where the vehicle title is only handed over in exchange for repayment of the outstanding loan claims.

However, the vehicle title must only be deposited for a purpose-bound loan (car loan). An unrestricted loan for general use, on the other hand, can be used to pay for a new car in cash and then allow the borrower to dispose of the car without restrictions.

Processing the car purchase with new car financing

It is practical to first decide on a vehicle, then negotiate the discount and purchase price with the dealer, and only then submit the specific loan application to finance the purchase price to the financier. The financier then knows the exact loan amount required and can process the loan application based on the now known amount of the requested loan.

Afterwards, the financier will obtain credit reports and as soon as favorable information is available, the financier will proceed with internal processing of the loan transaction. If you are unsure whether you have the necessary creditworthiness for new car financing, you can easily submit a preliminary credit inquiry to the respective financing institutions. Due to modern communication technology and established processes in new car purchases, processing times are usually limited to a few days, so that the borrower can complete the new car financing successfully and pay for the new car within a few days of applying for the loan.