You are about to buy a new car, but you are not yet sure how you are going to finance your car purchase? Here we explain the different tracks and the pitfalls to avoid!
Financing options for a new car
When buying a car, how do you choose between using your savings and taking out a loan? What are the different types of loan that exist? Is a loan more interesting with a bank or a dealer? Here are a few things to think about.
- Interest rates have been low for some time now. Many people opt for credit when buying a car. But low interest rates also mean that your savings don’t pay off. The choice between debt or equity financing will therefore depend mainly on your financial situation and your wishes.
- The classic car loan is very popular because of its attractive rates compared to a non-earmarked instalment loan. It works in a similar way: once the bank has accepted your application (which includes proof of purchase of the vehicle), you will receive the funds and must repay in fixed and equal monthly instalments (which include interest and capital) over the entire duration of the loan. Some banks also offer you the option of borrowing more than 100% of the purchase value to cover insurance costs, road tax, etc. It should be noted that ecological cars can benefit from advantageous rates, both in terms of credit, insurance and taxation.
- Another type of loan that has gained notoriety in recent years is the balloon loan. It makes it possible to reduce the monthly payments: only part of the capital is reimbursed during the loan period, and the rest during the last monthly payment, known as the “balloon”. The proportion to be repaid at maturity varies according to the duration but is generally a maximum of 50%. Of course, interest always runs on the amounts not yet repaid. Although this loan allows you to better manage your monthly budget, you must be sure to be able to pay back the remaining part of the capital at the end. Otherwise, you may find yourself in default.
- Some dealerships also offer credit for a car purchase. They are reputed to offer lower rates than banks, even 0%. But is this really the most interesting solution? Read on to find out more.
0% car loan: what is it?
Some dealerships offer very low rates for a car purchase, sometimes as low as 0%. At first glance, this method of financing seems interesting, since you would only have to pay back the principal and no additional interest. But is this really the case? Never forget that borrowing money costs money, even when you think you’re dealing with “free financing”. Here we explore for you the “hidden” costs that can be associated with a 0% loan.
- First of all, there is no such thing as free credit. Any interest you don’t pay on this loan will be covered by the dealer. It is therefore a commercial gesture.
- Since the dealer is paying the interest cost, he will often limit the length of time over which the credit can be taken out, in order to limit this cost. Over a shorter term, your monthly payments can become exorbitant.
- The commercial gesture on the loan rate also means that the dealer will not give you any extra gifts on the car :
- He will give you no or only small discounts on the vehicle. Yet the discounts you can expect on a new car can quickly exceed the interest you would save on a short-term car loan. So is it really worth doing without?
- On the other hand, if you want to resell your old car to partially finance the new one, make sure its value is not underestimated. This is another procedure known to dealers to compensate for the advantage given on the loan. Once again, calculate carefully whether what you lose on the trade-in of your old car compensates well for the interest you save on the loan.
- Opening a line of loan: Even if you don’t have to pay the interest, the 0% car loan implies opening a line of credit. It will therefore be recorded in the registers of the Centrale des Crédits aux Particuliers, which could affect your chances of obtaining another loan. There is therefore no advantage at this level compared to a classic car loan.
- Finally, to grant you a 0% loan, the dealer will ask you for a substantial deposit. You will have to have this amount at your disposal and accept to do without it to benefit from this type of loan.
Contrary to what you might think, a 0% car loan is not free of charge. Don’t be fooled by appearances and calculate your potential gains and losses before choosing your financing method.