The German market for car loans
According to a study by the Bankenfachverband (“Market Study 2014 – Consumer and Automotive Financing”), in 2014, 27% of privately purchased cars in Germany were financed with a loan. These include classic car loans and balloon financing, which were taken up online or in a bank branch, as well as dealer financing.
According to the study, the average purchase price of a vehicle amounted to.1 16,100, whereby new cars with.5 22,500 had, surprisingly, a significantly higher purchase price than second-hand cars with.5 11,500. 40% of the new, but only 11% of used vehicles cost more than.000 20,000. The share of purchases using new financing was significantly higher for new cars (35%) than for used cars (21%).
Dealer financing is only visually favorable
A significant proportion of vehicle financing is provided directly to car dealers, who have long considered installments to be an indispensable part of their sales promotion. Typically, such financing is advertised with very low interest rates – not infrequently 0.0% -. At first glance, this seems to eliminate the need for a car loan comparison. On closer inspection, however, the visually favorable offers of the dealers turn out to be a fallacy.
The reason: If a buyer makes use of the retailer’s installment at interest rates below the market level, he implicitly waives part of the discounts on the list price, which could be achieved in cash. As a result, the low interest rates are cross-subsidized by the supposedly benevolent borrower himself. This is not borne out by many buyers, because despite the “zero percent financing”, the retailer offers a discount of z. B. 5% einrumt. Cash-in-cash, on the other hand, could receive 20%, depending on the situation on the vehicle market.
Case study: Car loan vs. Hndlerfinanzierung
When comparing dealer financing and car loan of a bank, it has to be determined how high the discount on the list price additionally achievable by means of cash payments would have to be, so that the bank loan is more favorable than the cross-subsidized H trotz despite nominally higher interest rates ndlerfinanzierung.
If a dealer offers a “zero percent financing”, a new car with a purchase value of 22,500 and a term of 36 months can be financed at a monthly rate of 625. If a car loan with an effective interest rate of 3.25% is available on the “free” market, 21.426 $ can be financed as a net loan with the same monthly installment and three years financing period.
Additional discount of 5% equalizes the interest subsidy
It follows that the car loan from a bank is just as expensive as the dealer financing, if an additional discount of at least 4.8% can be negotiated. This value is understood as a “break-even”, from which the interest rate advantage resulting from the cross-subsidization of the dealer is fully offset. The further the additional discount goes beyond the break even, the more advantageous is the classic car loan.
In practice, it would rarely be a problem to negotiate discounts on this scale also because shoppers are much more difficult to calculate with cash payments for traders and therefore better positioned for price negotiations. This is because traders are much more difficult to estimate the willingness to pay of cash-in-hand and therefore have to use discounts more extensively than buyers, where a higher price is based only on the monthly rate is transferred.
Comparison of classic car loan and balloon financing
Balloon financings are an alternative to classic annuity loans with constant monthly installments and full eradication. Balloon financing significantly reduces current monthly payments by agreeing a high final closing rate. The final installment roughly corresponds to the planned residual value of the vehicle at the time of its fulfillment, so that the residual value is released during the term.
The release of the residual value of the vehicle and the related rate reduction during the runtime has its price. Car loans with a closing rate are, in absolute terms, much more expensive than annuity loans, even if the effective interest rates of both loan options are identical.
Balloon financing at the same interest rate 64% more expensive
Here is a case study: If a vehicle is financed with a purchase price of 22,500 without down payment over a period of 36 months, the monthly rate of a classic car loan (annuity loan) totals 674. Over the entire term, the debt service adds up to ¼ 24,264, less the net loan amount paid, resulting in an absolute financing cost of 64 1,764.
With balloon financing, the monthly installment can be reduced to 393 under otherwise identical conditions, if at the same time a final final installment of 11,250 $ is agreed. The debt service including the balloon rate adds up to.3 25,398 and interest costs amount to 98 2,898. Compared to the accumulated interest amount of the annuity loan, the cost premium is approximately 64%, although the effective interest rate of the two financings does not differ. This is due to the final rate, which slows down the repayment and incurs interest during the entire term.
Car loan comparison: Security is not a must
Car loans do not necessarily have to provide a security for the financed vehicle. In principle, any non-earmarked installment loan is also suitable for the purchase of a vehicle. If a security is required, the additional collateral for the bank should be reimbursed by the latter at lower interest rates.
However, that is not always the case. In itself hedging arrangements do not allow credit approval despite existing negative features. This is only possible with specialized providers and there only under other conditions.
Financing, service and insurance: Complete packages are rarely worth their money
The search for a favorable car loan is usefully combined with the comparison of necessary insurance and service contracts. The complete packages from dealers and manufacturers are seldom a good choice, because the product mix of liability and comprehensive insurance as well as protection cover always includes mediocre parts of the contract. More advantageous is usually the complete separation of financing, service and insurance and the targeted search for a suitable contract for each of the three components.