Auto credit falls under the category of consumer credit. By nature, this type of credit is opposed to real estate credit which makes it possible to finance the purchase of real estate (houses, apartments, etc.). Consumer credit is granted by banking or financial organizations. It will be aimed at consumers (individuals) as part of their purchases of consumer goods (cars, appliances, etc.). French regulations specify that the amount of this credit can be between € 200 and € 75,000. The repayment period must be greater than 3 months. Consumer credit is generally offered by organizations specializing in this type of service. This type of service commits the borrower financially and precautions must be taken by professional organizations. To avoid too hasty a commitment, a statutory withdrawal period is provided. It is a minimum of 7 days and is extended to 14 days in the context of a remote subscription (by phone or internet). The funds will not be released until the expiration of this period. In order to have the funds available more quickly, the borrower can waive this right of withdrawal.
Like all financial credits, auto credit requires financial guarantees from the consumer. Depending on the type of financing chosen, the lender will carry out various checks to verify the creditworthiness of the borrower. These measures aim to prevent household over-indebtedness. The lender organization will in particular obtain information on the composition of the household and on the various fixed household incomes. Situations will be favored for obtaining auto credit. The CDI is not compulsory but it is preferable for example. The organization will also need to calculate the household debt ratio by comparing the fixed monthly charges and the fixed household income. If this ratio is too high (if the charges represent too large a share of household income), the car loan may be refused to the borrower. The number of over-indebtedness files filed increases every year in United States. Between 1990 and 2015, the number of files filed increased by 140%. The French therefore tend to get into debt. It is up to the financial organizations to set certain limits in order to limit the drift. Too easy access to credit (auto credit or not) may contribute to the increase in the number of over-indebted households, as consumers are not necessarily aware of their financial commitment.
Auto credit is a consumer credit since it allows you to finance the purchase of a consumer good: a car. In the United States, almost one in two consumer loans is devoted to the purchase of this good. The advantage for consumers of using this type of financing is, on the one hand, that they do not use all of their available savings. Some of the households have sufficient capital to buy a vehicle, but still choose to turn to auto credit. Indeed, although self-financing is attractive, it is sometimes safer not to spend all your savings in a single purchase. Conversely, the purchase of a car represents for many households an important part of their budget. They often cannot finance it with their own funds. Auto credit is therefore a necessity.
There are different types of auto credit aimed at individuals wishing to acquire a vehicle. These auto loans will generally present the same financial commitments for the borrower. The different loan rates may however vary depending on the type of financing chosen. The choice of the borrower will generally depend on his different wishes including immediate ownership or not of the vehicle and a new car or a used car. Certain financing methods are specific to the purchase of a new vehicle.
Leasing with a Purchase Option (LOA) is a financing method allowing individuals to acquire a new vehicle. This is the equivalent of "leasing" which is intended only for professionals. It offers consumers different options: owning it by paying the entire remaining sum, returning the vehicle or taking another vehicle. The dealers and financial organizations offer Rental with Purchase Option. An initial financial contribution is recurrently necessary. This contribution will represent a maximum of 15% of the purchase price of the car, it may act as a deposit and be returned to the consumer who chooses not to buy the vehicle. A contract will be signed between the parties. It will determine the monthly payments owed by the consumer for a period which will vary between 24 and 72 months. This type of auto loan is mainly intended for consumers who want to change their car regularly and do not want to own it immediately.
The balloon loan is also a type of auto loan used to finance the purchase of a car. It is mainly used for new cars but can also be used for often very recent used cars. It finances part of the initial value of the vehicle. The monthly payments will therefore normally be lower than that of an LOA since the consumer does not commit to the totality of the value. The contract will provide for a fixed period of between 12 and 48 months as well as a maximum mileage package to be respected. This credit allows at its term either to return the car or to buy it back by balancing the remaining amount. This type of credit is rarely used, the LOA being preferred by consumers and auto sales professionals.
To finance his purchase, the consumer can choose the affected credit. The affected credit has the particularity of being associated with the purchase of a very specific good or service. Thus the affected auto credit is subordinated to the purchase of a car. This credit generally allows the acquisition of a new car but can be used for the purchase of a used vehicle. It allows the purchaser to benefit from security in the event of failure to deliver the vehicle, for example. Thus, if the vehicle is not delivered or if the sale is not finalized, the car loan is canceled. In the same sense, the sale of the car can be subordinated to the granting of the car loan. If the loan is not granted to the borrower, the sale of the car can be canceled without affecting the latter. However, this subordination must be specified in the sales contract. In fact, the situation occurs regularly insofar as the lender is often the dealer selling the vehicle. The consumer is therefore not financially committed until the sale is made. The maximum duration of the contract will be 84 months and the sum loaned may not exceed € 75,000. The solvency (the capacity to reimburse) of the consumer must be verified by the lender. The credit may be repaid in advance under certain conditions. With this type of financing, the consumer becomes the owner of the vehicle upon delivery.
As part of the purchase of a used vehicle, recourse to a personal loan is most often used. With this credit, the consumer is not obliged to specify the nature of his purchase to the lender. Indeed, he is free to dispose of the loaned sum and is not forced to use it for the purchase of a car. This can appear as a disadvantage since the release of funds does not depend on the good delivery of the car. The consumer will dispose of the borrowed amount even if the sale of the vehicle is not finalized. The personal loan will therefore have to be repaid by the consumer whether the vehicle is delivered or not. Like the affected auto loan, the monthly personal loan payments can be repaid early under certain conditions. For the purchase of a used vehicle from person to person, only the personal loan can be used by the purchaser to finance his purchase. Indeed, the affected auto loan can only be granted when the consumer makes his purchase from a professional (car dealership).
Long-term rental (LDD) is not considered a car loan but it can be used by the consumer. It is not a credit since the consumer will never own the vehicle even at the end of the expiry of the contract. However, it may be an alternative solution offering the possibility for individuals to have a new vehicle without becoming the owner.
Several financing solutions are therefore available to consumers wishing to acquire a vehicle. Since 2015, Rental with Option to Purchase (LOA) has been favored over credit allocated to auto by the French Like all loans, auto credit has advantages but also drawbacks. The borrower must be aware of his commitment to the lender organizations. Although sometimes the amount of the auto loan is not too high, financial organizations are obliged to make a selection and not to grant credit to non-creditworthy people.