Characteristics of loans to finance a car purchase
Isn’t a car loan like any other loan? If a car cannot be paid for by the savings, it does not necessarily have to be financed through the dealership where the car is bought. Alternatives often even have advantages.
The most important distinction: credit with or without earmarking
A consumer loan, ie a credit contract that is concluded between a consumer in accordance with § 13 BGB and an entrepreneurial business partner, is subject to some regulations. However, these are set up primarily for the benefit of consumers. These include, for example, a withdrawal period and certain information requirements that the consumer must comply with.
However, the collateral that must or may be required for the loan is not regulated. Here lenders are completely free to design their offers. This freedom gives customers some advantages – especially when it comes to car loans.
There is no fixed definition, but the practice of recent years shows very clearly: For example, you can apply for a car loan via Best-In Credit, which by definition is a dedicated loan. This means that the borrowed money may only be used for the purpose stated in the application. In order to be able to offer such loans as cheaply as possible, banks generally take the car as “security”. However, the vehicle does not have to be handed over, as would be the case with the typical pawn. A transfer by way of security is agreed instead. The bank becomes the legal owner, while the buyer of the vehicle is demoted to the “owner”. It is agreed in the loan agreement itself that the car automatically becomes the property of the borrower after full repayment.
The main disadvantage of this procedure, however, is that the registration certificate part 2 must also be handed over to the lender. This keeps the document in the safe during the term. However, many branches no longer have their own vault at all, so it may take a while for the document to be available if necessary. In addition, as the owner, the bank has the right to object to measures that could reduce the value of the car. So if you want to put the black BMW 20 cm lower and paint green, you will definitely hear a no from the bank.
Non-earmarked loans can be cheaper
As mentioned earlier, a dedicated loan with credit protection (in this case, vehicle ownership) is generally safer for the bank, which is rewarded with a lower interest rate. However, we are currently in an absolute low interest phase. Above all, this means that there are no major differences between an “expensive” and a “cheap” loan. In return, an unsecured loan not only brings the obvious benefit of less effort, but can mean huge savings despite the higher interest rate.
If a customer comes to the dealership and receives a loan offer, the basis of this offer is normally the normal sales price. Large discounts and reductions are usually not possible because the interest advantage of this cheap offer has to be priced in. If a larger discount were granted on the purchase price, the favorable condition of the loan offer could no longer be maintained.
It is different with buyers who pay the new car directly in cash
Discounts of 20 to 25 percent are not uncommon here. In order to enable a direct comparison, customers should first have the car dealership calculate how financing would be organized in the dealership. The next question would be what discounts are possible when paying in cash. Interested parties can then use the “cash amount” to obtain a loan offer from another bank. Depending on the term and amount, normal installment loans are often available from an effective interest rate of 2 percent. In spite of the higher interest rate, the overall bill often results in high savings, sometimes several thousand dollars. That should be worth the effort for a car loan.