Among the wide range of financial services and products offered by banks and loan companies, you can almost choose to adapt the optimal solution to your needs. The needs are statistically concentrated in three basic areas: bills and similar obligations arising from “living costs”, cars, flats and other real estate. While in the first case the solution may be a short-term loan, in the second and third without an installment loan or credit is unlikely to be.
Let us remember that the financial commitment is all the more secure the better the borrower is able to properly prank him and to manage it properly. In this post, we will briefly discuss the topic of loans offered by financial institutions for the purchase of a car .
Special-purpose loan: how does it work?
The general rule is that the loan product specified by the bank as a loan for the purchase of a car is a targeted loan. This means that if you have signed a loan agreement with the bank to buy a car, we cannot use this loan differently. In the vast majority of cases, the banks themselves secure the loan, ensuring that the funds go directly to the seller.
The advantage of this form of loan is its much lower cost than would be the case for a cash loan. It is also important that it can be used for a longer period than it is the case with a regular cash loan.
Four ways to finance a car purchase
When deciding to take a specific loan, it’s worth spending some time analyzing the available products. Depending on the price of the vehicle, we can consider both a loan and an installment loan. Of course, in the case of new cars, the optimal solution will be credit, while in the situation when we decide to buy a used car, it may turn out that it is the installment loan that will make more sense.
The standard solution is a classic loan for “any” period. Its essence is the monthly repayment of principal and interest installments. The minimum period is 6 months and the maximum period is up to 10 years. In this case, no down payment is usually required.
The loan offered mainly by “car banks” closely related to the dealer of a given brand has a slightly different character. This type of loan has a large down payment, e.g. 50%. The remaining amount is paid by the customer e.g. after one year. The definite advantage of these types of loans is that they are not interest-bearing.
The specificity of the next car purchase credit model is a relatively low installment. At the end of the loan period, however, the consumer must pay the last installment of e.g. 20% of the car’s value on the day of purchase. No deposit is required for this form of loan. This loan model is called a balloon loan .
As consumers’ needs change more and more dynamically, financial institutions try to adapt their products to them. One of such solutions, copied from business, is a loan that operates on principles similar to consumer leasing . The service consists in repayment by the borrower of low monthly installments that cover the costs of car impairment. At the end of the contract, the borrower may decide to buy a car or an option where the lender buys back the car.
Car loan: remember the costs
Regardless of whether the liability was incurred at a bank or any other loan company, it is associated with a whole range of costs. Since financial trading institutions earn not only thanks to the interest rate on the loan granted, but also thanks to ever new fees, the borrower must be prepared for surprises.
So when calculating loan offers yourself, it should be remembered that the cost is primarily interest, usually from 8% to 13% per annum.
Added to this is the commission cost (usually 2% to 5%). Credit and car insurance may also be mandatory. The latter is associated with the assignment of rights from the autocasco policy. In the event of a car being damaged, compensation will be paid to the bank, not the borrower. It also happens that the condition for receiving a car loan may be securing it with a registered pledge.
The list of collateral (and therefore related costs) requested by the car lending institutions may be long. It is therefore worth checking well what exactly we should expect before making a decision about applying for a loan. Being well prepared in terms of content for the next step, which is signing a loan agreement, we will not be surprised by the fact that part of the cost of the loan is life insurance, loss of employment and loss of value of the car.
Creditworthiness with a car loan
By granting loans, loan institutions hedge themselves in a way that limits potential losses. However, before they prepare a contract proposal, they will verify the creditworthiness of the person applying for the loan.
As part of the rules for granting loans, various models for assessing creditworthiness and credit risk, as well as related offers and products have been developed. One of them is the simplified procedure.
When applying this procedure, the loan institution does not require, for example, an income certificate issued by the employer, but only a borrower’s declaration. The advantage of such a solution is the lack of the need to provide an additional document and often accelerate the credit process. The negative side, however, is probably the bank’s demand for a higher own deposit.