The auto loan
The purchase of a car is often a “pleasure” purchase and most of the time, a “mandatory” purchase, necessary to perform the acts of everyday life: go to work, drop the children to school, go shopping, go on vacation…
However, depending on the type of vehicle chosen, the amount of this purchase can vary significantly and the auto loan is the easiest way to buy a vehicle when you do not have funds at the time of purchase or if you do not want not use your savings.
It stands out as one of the most popular consumer credit in France.
What is auto loan?
This is a loan for all adults wishing to partially or totally finance the purchase of a new or used motor vehicle.
This is a service whereby a person buys a vehicle without having the money in advance.
The bank or credit institution that offers this loan, pays the seller of the vehicle instead of the buyer. In return, he reimburses each month a portion of the amount paid, plus interest, which may be higher or lower depending on the chosen repayment period.
A car loan can be used to finance an automobile, but also a motorcycle, a utility vehicle, a trailer, a caravan or even a camper.
It can also be used to finance all costs related to the purchase of a vehicle: pay the official documents such as the gray card for example, the insurance or the equipment and the car accessories (roof box, anti-theft marking, trailer hitch…).
To do this, their costs are added together with the price of the vehicle to determine the final amount of the loan.
Moreover, many “all-in-one” offers including auto loan, insurance, maintenance and assistance are currently offered by lending agencies and more particularly by car dealers.
What are the conditions to obtain a car loan?
Auto loan is offered by 3 major categories of lenders:
- Car dealers: they represent a significant advantage that is that the subscription of the car loan is done at the same time as the signing of the sales contract.
- Banks: they too necessarily have an offer for auto loans and this option is usually less expensive than a loan in concessionaire.
- Specialized auto loan organizations, which have a wide range of formulas dedicated to the purchase of a personal vehicle.
Before granting you this type of loan, the lending organizations ask the borrower for supporting documents in order to ensure repayment capacity of the borrower.
Nevertheless, the terms of subscription for a car loan are relatively simple. The required documents are: photocopy of identity document, proof of address, bank account statement, proof of resources and copy of the order form of the vehicle.
Namely, the amount of the car loan is capped at € 75,000, for a period of at least 3 months and a period of 14 days of retraction is granted.
Note that to be sure to benefit from the best offer, it may be wise to perform a simulation to compare the different offers and select the most advantageous.
The simulation of auto loan?
As mentioned before, many types of lenders can offer you a car loan. Faced with all its offers, a car loan simulation can allow you to compare all the offers in the market and to choose the best offer. This will also give you better bargaining power with different lenders.
Many sites allow you to perform your auto loan simulation by entering the term on which the loan is to be extended, as well as the amount allocated. From this simulation, many offers will be available to you and you will only have to consider the offers you consider most relevant to you.
Performing your simulation will also give you an idea of the commitment your purchase will make. For example, you can determine what your monthly payment will be and adjust according to your income. You will also be able to determine the duration of your refund.
It is important to have all these elements in mind before you start buying a car and negotiate a car loan.
What are the elements that make up the auto loan?
The overall cost of the car loan is broken down into several elements, which must be compared one by one when the various offers offered by the lending institutions are put in competition:
- The personal contribution
This is the amount that the borrower will invest in the project without borrowing. Generally, this amount often comes from the savings of the borrower or his savings.
- The overall effective rate or TEG
Indicated in the form of an annual percentage, it represents the actual cost of the loan. It takes into account all the costs related to the credit, namely the interest, the insurance contributions as well as the handling fees and commissions or remunerations claimed by the lender.
- The nominal rate
This is simply the rate used as the basis for calculating the interest paid in each monthly payment.
- The duration
It is expressed in years or months and indicates how long the borrower will be in debt. You should know that the maximum duration of a car loan is 84 months (7 years). This element is also decisive in calculating the amount of monthly payments. Indeed, the longer the credit period, the lower the monthly payments but the higher the credit interest.
- Monthly payments
They are the amount the borrower has to pay each month, including a share of capital and interest. To avoid over-indebtedness, the monthly payment, added to those of your other current credits, must not exceed one third of your income.
It protects the borrower in the event of an accident of life that would prevent him from honoring his payments. The insurer then replaces him to pay the amounts due. Some insurances are mandatory, others are not. It is important to compare the guarantees and franchises offered, which can vary significantly from one offer to another.
- The total cost of credit
It is mentioned in euros and represents the total interest paid on the loan and is obtained by subtracting the borrowed capital from all the monthly payments to be repaid.
What is the difference between new and used car loans?
The choice to be made between a new car or a used car, is done according to the means of the borrower. Indeed, buying a car is an investment: the maintenance has a cost. To find out if it is a good deal, several criteria must be taken into account: the purchase price of the vehicle, the cost of its use (maintenance, fuel and auto insurance) and its resale value.
The main advantage of a new car is that it benefits from the manufacturer’s warranty but is more expensive to sell than a used car.
Conversely, the advantage of the used car, of course, is the price and cost of insurance, which are lower than for a new car. However, in addition to those sold in dealership, a used car can present hidden defects and will certainly have a shorter life than a new vehicle. However, in some cases, buying a very new used car can be a good alternative.
With regard to auto loans, the interest rate on credit is often much more advantageous for new cars, while the interest rates for used cars are subject to variations depending on the age and condition of the vehicle.. In addition, it should be noted that obtaining credit for a new car is easier than for used vehicles.
In addition, for a used car, it is advisable to limit the maximum duration of the car loan because the price of a car can fall by more than 15% each year, so if the repayment period is too important, the risk is to pay off a car that no longer has value on resale.
What are the advantages and disadvantages of auto loan?
Unlike personal credit, the car loan is a loan allocated to the purchase of a vehicle. That is, it is directly related to the purchase of a vehicle and the loaned amount can not be used for other purposes because the sale of the goods is conditional upon the granting of the credit and the release of funds is linked to the proper completion of the proposed transaction.
Conversely, the personal loan, is an unrestricted credit, that is, the funds can be used at the convenience of the borrower.
Nevertheless, besides this constraint of purchase, the auto loan brings more security for the customer:
- If the credit is refused, the purchase of the vehicle is canceled.
- If the vehicle is not delivered, the credit and the sale of the vehicle are canceled and the borrower has nothing to repay
- The car loan rate is generally lower than that for the same loan amount and the same duration for a consumer credit.
- If the borrower can not find a lender, he can cancel the sales contract without charge.
Similarly, in general, the borrower may have a higher amount of credit under a car loan than in a personal loan and also benefit from a longer repayment period, the lender knowing exactly what the unlocked funds will serve.
On the other hand, in case of theft or destruction of the vehicle, whether the credit contracted is a car loan or a personal loan, the monthly payments must be settled until the final expiry of the contract, failing to have taken out an ad hoc insurance.
In conclusion, the car loan is an easy access credit, offered by various lenders, and which is addressed to all (young active, family, senior) but before subscribing to this type of credit, it is imperative to ask the right questions in order to choose the vehicle that will not only meet all the immediate needs, but also anticipate its future needs while taking into account a major parameter: its repayment capacity. top