A car loan is an installment loan that is tied to the purchase of a car – a new car or a used car. A car is the most commonly funded commodity. Due to the purpose, the interest on a car loan can be slightly lower than the conventional installment loan. The possible terms for financing range from twelve to 84 months. The loan usually runs for three to four years (36 to 48 months).
The term of the loan has been fixed from the start. In the same way, the interest is fixed right from the start. The repayment until full repayment is made in equal installments so that an overall car loan is easy to calculate and clear.
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The conditions offered by the bank depend in part on the creditworthiness (creditworthiness) of the future borrower. The creditworthiness is a statement of the probability with which the loan will be repaid in accordance with the contract without disruptions during the term. The bank therefore initially specifies the conditions for the loan in a range ( from x percent to y percent ). Do not be blinded by favorable conditions. Only after the credit check is the interest rate applicable to the individual case for the borrower.
However, there are also banks that do not make interest rate differentials with different credit ratings. All customers receive the same interest on the car loan.
The conditions can, therefore, be very different. Offers for a car loan also differ in the fact whether special repayments or early repayment are possible without additional costs.
No car loan without a credit check
Your personal details will be checked before a loan is granted.
All banks do a credit check regardless of interest rate to see if the loan is approved at all.
The amount of regular income and fixed monthly expenses are included in the credit check. Credit rating information is also included. The bank uses it to find out whether there have been irregularities in the repayment of existing snowballs in the past.
In addition, the credit rating calculates a probability value for the correct repayment of future loans (scoring) for each person – even if they have no negative credit rating entries.
The creditworthiness is checked after the loan application. For this, the personal data (first and last name, address, date of birth), the reference account (current account for the payment of the loan amount and the debiting of the monthly installments) as well as the income and expenses must be specified.
The application for the car loan must be submitted to the direct bank together with the following documents and information by post (some institutions also offer an online check of the loan application in advance):
- Copy of the purchase contract for the car,
- Proof of regular income (copies of the last three salary certificates, for self-employed persons from the tax assessments),
- Information on the monthly fixed expenses,
- in the case of existing snowballs: details of the remaining debt, the amount of the monthly installment and the date of the full repayment,
- Specification of the current account connection and
- Consent to credit rating information.
If the car buyer receives a loan approval, as a new customer with the direct or car bank, they must have their identity confirmed using the PostIdent procedure. To do this, it is necessary to go personally to a post office or agency with the direct bank’s ID card and PostIdent coupon. Post sends the confirmation of legitimation to the bank. The latter then posts the loan amount for the payment of the car to the borrower’s checking account. The monthly debit of the installments is also made from this.
A car loan is not linked to the provider of the current account. Snowball to finance the new car can basically be applied for from any bank (not just the house bank). By comparing different offers, car buyers quickly save several hundred or thousand dollars.
A cash discount means that financing from a bank is usually cheaper than from a dealer
If a car can be paid in full or in part in cash, there are huge discounts.
In addition to financing through a bank, a car can also be financed directly through the dealer. Interest rates are usually low there -, especially for new cars. For cash payers, however, retailers usually give discounts on the purchase price, which is often ten to 20 percent. The financing amount for the snowball is then correspondingly lower, which can make it cheaper than the dealer credit.
When comparing an offer from the dealer and the bank, it is helpful to state the total costs. In such a case, the effective interest rate cannot serve as a comparison since the financing amount is not identical for the two offers.
Another alternative for financing a car is leasing. With leasing, customers pay a monthly usage fee but do not become the owner of the vehicle. At the end of the leasing contract, usually after three years, the vehicle is returned to the dealer or bought at a price set at the beginning. Private individuals generally have no financial advantages with leasing.
How banks work differently
As a prerequisite for a car loan, some banks require insurance, usually comprehensive insurance. Here it is advisable to critically compare the offers for advantages and disadvantages. If you have any questions, it is advisable to contact the bank and obtain further information.
In conventional banks, it is usually customary to deposit the vehicle letter as security with a car loan. With direct banks, it is usually not necessary to send the vehicle letter. A copy of the purchase contract is sufficient. Borrowers should be cautious when offering residual debt insurance because it is usually disproportionately expensive.
Rate levels must be affordable
In order to determine the appropriate rate, future borrower should compare their monthly income and expenses. It is advisable to include expenses that are incurred only once a year on a monthly basis and not to under-measure the cost of living. There should also be some leeway for unforeseen expenses. Once the rate has been determined, the term can be determined using the budget calculator, which is often online. Conversely, the rate amount can be determined when entering the desired term.