If you don’t have enough money to buy a new car, you don’t want to borrow from relatives and friends. We tell you about the types of auto loans and analyze their advantages and disadvantages.
What is an auto loan?
An auto loan is an interest-bearing loan issued by a bank and other financial organizations for the purchase of a car. The borrower buys a car and pays for it every month. The car is the property of the borrower, but it services as collateral for the entire period of loan repayment.
Who is involved in an auto loan?
The participants of a car loan are 4 parties:
- Future car owner (borrower) – a client who wants to buy a car but has only a part of the required amount;
- A car dealership that sells the client’s dream object – a car;
- A bank that offers the borrower to fulfill his/her dream of buying a car (that is, take a car loan);
- An insurance company that offers the future car owner to insure his/her motor third party liability and purchase an insurance policy.
Types of auto loans
- Classic auto loan. This is a regular car loan with simple conditions: you make a down payment, and later – a monthly payment taking into account the cost of the loan. To get a loan, you need to provide a full set of documents and pay for insurance. The main advantage of a classic car loan is the long term. The loan can be paid back for up to 10 years;
- Express auto loan. You can get such a loan on the same day because the bank requires fewer documents. Often it is provided only for new cars. Express loans require a large down payment, and the APR is higher than that of a classic auto loan;
- Trade-in. An old car acts as a down payment. The car dealer will assess the technical condition of the car and set a price – usually, it is 15-20% below market value. A credit car can be returned by trade-in;
- Factoring or interest-free loan. The borrower pays 50% of the cost of the car, the rest is paid in installments because the bank buys the borrower’s debt from the car dealership for a smaller amount. The borrower can save money on loan interest, but banks and car dealerships offer to buy unpopular models by factoring.
Benefits of auto loans
- Banks often approve loans without guarantors and additional collateral – a car serves as collateral. This increases the safety of an auto loan: if you are unable to make payments, you will only lose the purchased car;
- Most banks require the borrower to buy auto insurance. This ensures that the car will function perfectly;
- Thanks to the loan, you can choose from a large number of both new and used cars of various prices;
- Many car dealerships have partnerships with banks. This will allow you to receive discounts and bonuses, low-interest rates or even a zero rate when applying for a loan;
- A loan will help you buy a comfortable expensive car with an average income;
- A variety of auto loan programs allows you to choose the most beneficial cooperation scheme;
- You can repay the loan ahead of schedule, restructure it, etc.
Disadvantages of auto loans
- Loan overpayment for 5 years makes approximately 50% of the value of the car. Moreover, cars are getting cheaper every year;
- The amount of the monthly installment can only change as a result of restructuring, which is quite difficult to achieve. This situation may arise if you have lost your job or have to pay, for example, for repairs or treatment;
- The bank has the right to increase interest on loans or restructure debt at its discretion;
- Loan processing takes time and effort: you need to collect documents, submit them for consideration, wait for a decision, and sign many documents;
- You do not fully own the car until the end of the loan payments. You cannot donate or sell it;
- A penalty is charged for every day of payment delay;
- You cannot miss payments;
- If you have an average income level, you will have to give up entertainment and recreation – travel, trips to other cities, excursions, holidays, etc.;
- If you have not paid off the debt, the bank can initiate the alienation of property. As a result, a car enthusiast may be left without a car and without money. Some financial institutions charge a penalty fee that must be paid even after the alienation of property. This is due to the fact that fines are not included in the loan principal.
All penalties apply only to irresponsible payers. Borrowers who make timely payments and take a responsible approach to lending will not have such situations.
Auto loans pitfalls
- When buying a vehicle on credit, you need to purchase an insurance policy;
- Each bank promotes the services of a partner insurance company. As a result, you may be offered a program that is not the most beneficial;
It is also worth considering that many banks provide a commission for opening and closing an account, its maintenance. This also amounts to a few percent of the value of the selected vehicle;
- Buying a car for cash is more profitable than taking auto loans. But often the car owner makes a decision based on the timing of receiving the car. If you save money, you can spend a couple of years; and if you take out a loan, you can get behind the wheel in a few days;
- An interest-free loan in practice often turns into high-interest rates, expensive insurance, a short term, 50% down payment. With such lending, the choice of car models is rather poor;
- Express loans, loans without income certificates and down payment should be alarming. Loans on the most favorable terms are provided to borrowers who have proof of income, can make a decent down payment, and buy insurance.
When is it worth taking an auto loan?
You can safely take a loan in the following cases:
- For business (eg. taxi). The car you use will bring you permanent income and you can easily pay off the cost of the loan;
- Sharp price increases. In such a situation, it is much more profitable to take a loan and get a car now than to save up cash for many years;
- Solution to the transport issue. This applies primarily to residents of the suburbs, where public transport runs irregularly or does not run at all (at night);
- Purchase of a unique car. You can take a loan if you accidentally come across a car that you have been looking for a very long time: for example, a limited edition car that is not available for sale.
You should also take an auto loan if:
- Your income is high. You can repay the loan in a few months;
- You have a significant amount of money (70% of the amount) and take out a loan for a short period (one year);
- You have money to buy a basic set of cars. A small loan is needed to purchase an additional set of options.
The following conclusion can be drawn: it is most profitable to take a loan for a short time – this will help you avoid large overpayments.
When is an auto loan not needed?
You should think several times before applying for an auto loan if:
- You have a single source of income;
- Loan payment is equal to 30% of monthly income;
- You buy your first car. Auto maintenance, repair and fuel costs often come as a surprise to novice car enthusiasts.
To get approved, you must be employed and have proof of regular income. You only need to choose a car and a lender with suitable rates and terms. When preparing documents, carefully study each item of the contract, and consult about possible risks with a trusted lawyer. Calculate the final cost of the loan, monthly payments and potential force majeure situations. In this case, the loan will be safe and will not cause you problems.