Car loan

With the wide range of car loans to choose from, it is not easy to keep track of them. Every second new car is bought with the help of a loan; for used cars it is more than a third. How do you recognize a cheap car loan? We’ll explain it and show you how to  find it using our loan calculator . In this way you can get your new dream car without unnecessary additional costs.

5 car loan tips:

  1. Use cash discounts Use – a dealer-independent loan instead of financing from dealers or car banks. You can pay in cash when buying a car and benefit from discounts. The dealer loan offers low interest rates for current models, but often higher purchase prices and rigid guidelines.
  2. Compare loans – With offers from different banks, you can find the most suitable car loan for you.
  3. Increase creditworthiness – for example, use a second borrower. Additional collateral can increase your creditworthiness.
  4. Stay flexible – By keeping special repayments and payment breaks open, you stay flexible during the repayment.
  5. Include required insurance. Car – banks often require fully comprehensive insurance for the vehicle. This entails additional costs.

How to find the cheapest car loan

Do you know what makes a car loan cheap? Compared to other uses, the greatest cost leverage in car financing is not always the interest rate – it is hidden in the cash discount. This discount becomes possible if you choose a direct bank.

Car loan from a direct bank

A car loan directly from a direct bank can offer you many advantages:

Benefit from the cash discount

If you use an independent car loan , you can have the loan  paid out in cash. You can negotiate a discount for cash payments at the dealer. With the discount, the purchase price goes down, so you need less credit. And with a smaller loan amount, you will have to pay less interest!

Free choice of credit institution

Car dealerships usually cooperate with only one bank or directly with the bank of the car manufacturer. You then have no choice. With a free loan, however, all credit institutions are open to you. So you can choose a car financing with the greatest interest rate advantages and the best conditions.

Keeping special repayments open

Loans through a car bank usually do not provide for any special repayments or payment breaks. With a dealer loan, you are inflexible if you unexpectedly repay the loan early and thus save interest, or if you have payment difficulties!

No mileage

limit The car loan, which is independent of the dealer, is earmarked and finances the car without any further conditions. Dealer loans, on the other hand, often have a mileage limit anchored in the loan conditions. This is especially true for so-called 3-way or balloon financing . If you come over this limit, you will have to dig deep into your pocket again!

Lower loan costs

By comparing loans , you can choose the cheapest offer from a bank. Thus you reduce the loan costs significantly. At the same time, the independent loans are usually cheaper anyway, since they are earmarked as car loans and the bank uses the vehicle as security.

Choose a term of a maximum of 5 years

The chosen repayment term not only influences the amount of the monthly installments, but also the interest: There are cheap car loans especially with terms of up to 5 years (60 months), because the risk of repairs and expensive maintenance is lower. So if the vehicle is needed as security, the financier has a better chance of receiving compensation without deductions, for example due to previous damage or the like.

Benefit from cash discounts

Anyone who has ever talked to a dealer about the purchase price and financing offers knows the basic problems of this type of financing: They are practically only valid for a limited period of time, for current models with special equipment features or only if you trade in your used vehicle at the same time.

The car dealers’ low interest rates can have a catch: the dealer must, in turn, give the financing bank a guarantee that the contract will be fulfilled. In case of doubt, he puts the risk on the purchase price, which you can no longer negotiate with this variant. The keyword here is the already mentioned cash discount.

The situation is different with financing – whether credit or regular installment credit – via independent institutes that identify you as a cash payer. Experience has shown that you can negotiate larger price discounts, especially for previous models or standard equipment. Depending on the amount of the purchase price, this discount then exceeds the costs of the cheaper alternative via the car dealer.

Example calculation: dealer credit vs. Car loan

An example calculation illustrates the savings potential. This is based on the assumption that you want to finance a car for a purchase price of 15,000 euros. Exemplary interest amounts are chosen for this.

  Manufacturer’s own car bank Independent direct bank
Purchase price of the car 15,000 euros 15,000 euros
Negotiated estate 0 percent 10 percent
Net loan amount 15,000 euros 13,500 euros
Effective annual interest rate 4.5 percent 5.25 percent
Financing term 48 months 48 months
Monthly Rate 341.44 euros 311.68 euros
Total cost of financing 16,389.28 euros 14,960.51 euros
Savings   1,428.77 euros

As you can see, the monthly charge is almost 30 euros less than the comparable offer from the manufacturer’s own car bank. Due to the cash payer discount, savings of over 1,400 euros could be achieved here. You can invest this money in new equipment details or use it as a reserve for repairs.

Requirements for a car loan

In order to apply for and get a car loan, you must meet these conditions:

  • Legal Age : You must be at least 18 years of age to take advantage of a car loan.
  • First place of residence in Germany : You must live predominantly in Germany and have your first place of residence here.
  • German account : Your account must be held with a bank in Germany.
  • Regulated income conditions : You must have a regular income. Depending on the bank, this can be income as an employee or from self-employment.
  • Creditworthiness : Your creditworthiness must be sufficient for a bank to grant you a car loan. As a rule, a credit report is therefore  carried out. Credit providers often want additional protection in the form of insurance (e.g. residual debt insurance) or a capital investment.

Car finance in 5 steps

If you have decided not to buy your new car just from the savings, the process is usually as follows:

Choose your dream car

First of all, you should ask yourself whether you want to finance a new or used car. Used cars usually have the advantage that they are cheaper than new cars. On the other hand, you have to expect repairs or replacement of wearing parts during the term. It is beneficial if the car dealer gives a guarantee on the used vehicle, similar to what is usual for new vehicles. 

  • Price comparison : Before financing the vehicle, check whether the same or a similar model is available for less from another dealer. Use a price comparison on the internet for used cars.
  • Additional costs : When choosing a vehicle, consider other factors that influence the fixed costs for the vehicle, such as engine size, fuel consumption or loss of value.
  • Make and model: After asking about new or used cars, you decide on a car make and model. Take into account here where your actual needs lie. Does it really have to be the SUV with a lot of horsepower, for example, or is an economical station wagon enough?

Do a household bill

When you have decided on a car, you should check your financial situation. Take the bank statements for the last six months to hand and break down your income and expenses. Extraordinary payments should be taken into account, bonus payments should be factored out. The difference shows you how high your monthly rate can be.

Choose the cheapest type of financing

There are various options for financing the car. In the following table we have compared all the important aspects of the common loan options for you:

  Car loan leasing 3-way financing
benefits Cash discount

Special repayments

No mileage limit

Low monthly costs

Easy returns

Lower rates compared to Installment purchase with the same term
disadvantage Rates are higher than with 3-way financing or leasing The car remains the property of the leasing company

No wealth is built up

Seduces to low repayment

Interest rate increase risk with follow-up financing

According to a study by market researchers at GfK, around 71 percent of the cars financed in 2016 were financed through a classic installment loan. 17 percent opted for 3-way financing, while 20 percent opted for leasing. In 2016, only two percent opted for another form of financing.

Have the necessary documents ready

  1. Payrolls
    When you are employed, banks typically need your most recent payroll slips. With this you can prove regular income.
  2. Bank statements with incoming salary In addition to pay slips, some banks require bank statements for the last three months. This applies in particular to employees or trainees.
  3. Registration certificate part 2 of the vehicle
    With the registration certificate you confirm that you own the vehicle. Sometimes only one copy is necessary. However, if the vehicle is transferred to the bank as security for the duration of the car loan, the bank needs the vehicle registration document.
  4. Tax assessments
    Self-employed or freelancers who do not receive their income from employment must prove what they earn with current tax assessments. Often tax assessments from the past three years are requested.
  5. BWA – business evaluation
    When the self-employed apply for a car loan, banks usually also require a BWA. This is especially true if the most recent tax assessment was made a long time ago. The BWA is usually drawn up by a tax advisor.
  6. Transfer by way of security contract
    Some banks conclude their own contract for the transfer of ownership of the vehicle by way of security. This contract is then part of the loan agreement.

Loan payout and car purchase

  • Payout: If you opt for a dealer-independent car loan, it is usually paid out after a few working days. The prerequisite is that the bank agrees to your application and that you meet all the necessary conditions. You can then have the loan amount paid out in cash directly at the bank and buy the car.
  • Buy a car: Take advantage of a dealer-independent loan and trade with the car provider. Often discounts of up to 30 percent compared to the list price are possible. Also, try to haggle over options or extended warranty for new cars. As a cash payer, you usually have clear advantages in all negotiations.
  • Registration and Insurance: After buying it, you need to register your car. Many car dealers take over this service for their customers. Regardless of whether you register the car yourself or hire your car dealer to do it, you need valid insurance coverage. Register your new car with an existing car insurance. Or use the advantage of changing vehicles to find cheaper insurance. Carry out a car insurance comparison for this . The eVB number after the approval of the new insurer is then required for the vehicle registration.

Useful additional information

There are many other things that you should be aware of when it comes to car loan. Here you will find everything you need clearly arranged.

Beware of three-way financing

Caution is advised with the car loan with a final installment, also known as three-way financing. In this case the financing is structured like a leasing. You pay a deposit, sometimes even without it for special offers, and pay a low rate over a period of three or four years.

At the end of the financing, the balloon must be paid, the final installment, which regularly makes up more than half of the vehicle’s value. However, this depends on the recoverable residual value, which often leads to disputes between the dealer and buyer. Because even if you return the vehicle, there may still be an outstanding balance. In this case, you are paying for a vehicle that you no longer own.

Check the indicated residual value

Have the evaluation features of the three-way financing explained to you in detail and check the specified residual value by independent experts. Automobile clubs and valuation companies keep lists for each model type and make based on actual sales values.

Check insurance requirements

An additional point that comes into play when financing through car banks is the insurance condition in the contract. Typically, the dealer will ask you to take out fully comprehensive insurance for the vehicle against all possible damage. Because if the total loss occurs first, the security for the car financing is gone. Conversely, this of course increases the actual costs for the vehicle, which you should consider when making a comparison.

At independent direct banks it is now common practice not to send the vehicle registration documents. You then only have to submit a copy of the registration certificate Part II and thus have little bureaucratic effort.

Saving on insurance is possible

Some contracts stipulate that the borrower, vehicle owner and policyholder are identical. However, banks are deviating from this rule in more and more tariffs. The woman can finance it, but the man is entered as the vehicle owner. Playing around with percentages and other discounts with insurance companies is therefore possible. The only requirement is that the woman is also in the vehicle registration document.

This is how common car financing is in Germany

According to figures from Deutsche Automobil Treuhand, more than half of consumers in Germany use a loan to finance new cars. Partial and full financing are taken into account. Around 20 percent of consumers choose to lease a new car and only a quarter pay for the new car without a loan.

The picture is somewhat different for used cars. Here in Germany around 40 percent are partially or fully financed. Only two percent of used cars in Germany were leased in 2015. Around 58 percent of car owners bought their used cars without financing.

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Igor Smith/ author of the article
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