Flawless paint, sleek form, modern equipment, beguiling fragrance in the interior … A new car is a dream on four wheels for many people. There is only one catch: not everyone can put the full price of a freshly produced model on the table. But they don’t have to. Instead of paying all the money in one go, it can be financed by installments – with a car loan. You can read all you need to know about this here.

Financing a vehicle – a loan for buying a car

30,250 euros – that is the average price of a brand new car in 2018. This has been calculated by Deutsche Automobil Treuhand (DAT). If you don’t have that much on the high side at the moment, you still don’t have to do without a drivable set of wheels.

The alternative is called car credit. Those who take it up pay off their vehicle over a longer period of time in monthly instalments. Once he has paid everything, he owns the car. Remember: The car loan is earmarked for a specific purpose! This means that it may only be used for car financing. You may have to prove this to the lender.

This lender can be the buyer’s house bank, the car dealer, the car manufacturer or a specialised company. Car loans are also available from online providers. To find the best conditions, cost-conscious buyers should use comparison portals on the Internet, for example. And don’t forget: The drivers are responsible for the car. In addition to the installments, they have to bear the costs for maintenance, repairs, insurance and taxes.

Car loan – the classic car of vehicle financing

The car loan is the classic way to finance a vehicle. Basically it works like a normal loan. This means that the purchase price is paid off in monthly instalments that remain the same. The amount depends on the agreed term, the interest rate, the provider – and your financial possibilities.

Compared to the normal loan, the car loan is usually cheaper. This is because with the car you have a concrete security in your back pocket. After all, the car is worth something. If you are not able to pay the installments, your lender (for example the bank) can sell it. He cannot do this with a loan for a holiday trip that you have already experienced, for example.

Therefore, when financing a car, banks often require you to provide them with the most important vehicle documents. At the same time, they require a security transfer of ownership. This means that the car practically belongs to the bank for the duration of the car loan. But don’t worry: you can still drive the car without restrictions. And once all the payments have been made, you will be the sole owner.

The advantage of the car loan is that it is simple and offers the buyer a clear structure with unchangeable instalments. This allows the vehicle to be financed in a controlled manner. A counterargument: the monthly premiums are comparatively high and not flexible.

Car loan with final instalment – financing with a big end

It does not always have to be the traditional installment credit. Other models offer more financial leeway. For example, financing with a final instalment, where you benefit from lower instalments. This means you can possibly save up even during the instalment phase. And use the money for something else – or use it to pay the final instalment. The car loan with final instalment is available in the following two main variants.

Car loan as balloon financing

The balloon financing works like this: The term is usually between twelve and 60 months. In the meantime, small installments are charged compared to the classic car loan. In fact, they are so low that in the end the greater part of the amount borrowed is still missing.

What is left over, the borrowers have to transfer in one go. Ideally from the money that they have saved up to that point because of the previously low installments. The amount of this final instalment is fixed at the start of the contract and depends on the assumed residual value of the car. If there is not enough money for the final installment, the arrears may have to be paid off with a separate loan.

The rather favourable rates and the long term are arguments in favour of balloon financing – also known as residual rate financing. However, the disadvantage at the end of the term is the high final instalment. In addition, discipline is necessary to save enough money for the remaining instalments during the term of the loan. The bottom line is that balloon financing is usually more expensive than the classic car loan.

The 3-way financing

This variant is practically identical to balloon financing and follows the same rules. The 3-way financing only earns its name at the end of the term. Because there the borrowers have three options.

  1. They return the car and thus save themselves the high final instalment.
  2. They pay the final instalment and thus own the vehicle.
  3. They finance the remaining debt with another (car) loan. Even then the car is theirs.

One advantage of 3-way financing – apart from the attractive instalments – is its flexibility. Those who use it do not have to commit themselves from the beginning. Depending on their current options, borrowers can keep the car or return it. In the latter case, however, the condition of the vehicle must be taken into account. If it is damaged or defective, additional fees will be charged.

Otherwise, the same disadvantages apply as for the car loan as for the balloon financing: high final rate and total costs.

Car loan – these are the requirements

Whether a car loan with or without a final installment – anyone who wants to finance their vehicle must meet certain conditions. As a rule, these include

  • Coming of age
  • German nationality or valid residence permit
  • Residence in Germany
  • Account with a financial institution in Germany
  • Regulated income
  • No negative entry at the Schufa

Ultimately, the same rules must be observed as for normal borrowing. If only one of the conditions is missing, this makes car financing more difficult. Or even makes it impossible. For this reason, the Schufa score should be checked and, if necessary, improved before a credit application is made.