The auto loan
Buying a car is often a “pleasure” purchase and most of the time a “compulsory” purchase, necessary to carry out everyday activities: going to work, dropping the children off at school , go shopping, go on vacation ...
However, depending on the type of vehicle chosen, the amount of this purchase can vary significantly and the auto loan is the easiest way to buy a vehicle when you do not have funds at the time of purchase or if you do not want not use your savings.
It has established itself as one of the most popular consumer loans in United States.
What is the auto loan?
This is a loan intended for all adults wishing to partially or totally finance the purchase of a new or used motor vehicle.
It is a service through which a person buys a vehicle without having the corresponding sum in advance.
The bank or credit organization that offers this loan pays the seller of the vehicle instead of the buyer. In return, the latter reimburses him each month a portion of the amount paid, to which is added interest, which may be higher or lower depending on the chosen repayment period.
Taking out a car loan can be used to finance an automobile, of course, but also a motorcycle, a utility vehicle, a trailer, a caravan or even a motorhome.
It can also be used to finance all the costs relating to the purchase of a vehicle: pay for official documents such as the registration document for example, insurance or even car equipment and accessories (roof box, anti-theft marking, trailer hitch…).
To do this, their costs are added together with the price of the vehicle to determine the final loan amount.
Moreover, many “all-in-one” offers including auto loans, insurance, maintenance and assistance are currently offered by lending organizations and more particularly by car dealers.
What are the conditions for obtaining an auto loan?
The auto loan is offered by 3 main categories of lenders:
- Automobile dealers: they represent a significant advantage which is that the subscription of the automobile loan is done at the same time as the signing of the sales contract.
- Banks: they too necessarily have an offer in terms of auto loans and this option is generally less expensive than a loan from a dealer.
- Organizations specializing in car loans, which have a wide range of formulas dedicated to the purchase of a personal vehicle.
Before granting you this type of loan, the lending organizations ask the borrower for supporting documents in order to ensure the repayment capacity of the latter.
Nevertheless, the terms of taking out an auto loan are relatively simple. The required documents are as follows: photocopy of identity document, proof of address, bank identity statement, proof of resources and copy of the vehicle order form.
Namely, the amount of the car loan is capped at € 75,000, for a period of at least 3 months and a period of 14 days of withdrawal is granted.
Note that to be sure to benefit from the best offer, it may be wise to perform a simulation in order to compare the different offers and select the most advantageous.
The simulation of the auto loan?
As mentioned before, there are many types of lenders that can offer you an auto loan. Faced with all its offers, a car loan simulation can allow you to compare all the offers on the market in complete transparency and choose the best offer. It will also give you better negotiating power with different lenders.
Many sites allow you to perform your auto loan simulation by entering the duration over which the loan must extend, as well as the amount allocated. From this simulation, many offers will be available to you and all you have to do is take into consideration the offers that you consider the most relevant to you.
Performing your simulation will also give you an idea of the commitment that your purchase will represent. You can, for example, determine what your monthly payment will be and adapt according to your income. You will also be able to determine the duration of your reimbursement.
It is essential to have all of these elements in mind before you start buying a car and negotiating a car loan.
What are the elements that make up the auto loan?
The overall cost of the car loan is broken down into several elements, which must be compared one by one when competing between the different offers offered by the lending organizations:
- Personal contribution
This is the amount that the borrower will invest in the project without borrowing. Usually, this amount often comes from the borrower's savings or savings.
- The overall effective rate or TEG
Indicated as an annual percentage, it represents the actual cost of the loan. It takes into account all the costs related to the credit, namely the interest, the contributions for the insurance as well as the expenses of file and commissions or remuneration claimed by the lender.
- The nominal rate
This is simply the rate that is used as the basis for calculating the interest paid in each monthly payment.
- The duration
It is expressed in years or months and it indicates how long the borrower will be in debt. You should know that the maximum duration of an auto loan is 84 months (7 years). This element is also decisive in the calculation of the amount of the monthly payments. Indeed, the longer the duration of the credit, the lower the monthly payments but the higher the interest on the credit.
- Monthly installments
They correspond to the amount that the borrower must pay each month, including a share of capital and interest. In order to avoid over-indebtedness, the monthly payment, added to those of your other possible credits in progress, must not exceed one third of your income.
It protects the borrower in the event of a life accident that would prevent him from honoring his payments. The insurer then replaces him to settle the amounts due. Some insurances are compulsory, others are not. It is important to compare the guarantees and deductibles offered, which can vary significantly from one offer to another.
- The total cost of credit
It is mentioned in US dollars and it represents all the interest paid under the loan and is obtained by subtracting the borrowed capital from all the monthly payments to be repaid.
What is the difference between the auto loan for new and used car?
The choice to be made between a new car or a used car is made according to the means of the borrower. Indeed, buying a car is an investment: maintaining it has a cost. To know if it is a good deal, several criteria must be taken into account: the purchase price of the vehicle, the cost of its use (maintenance, fuel and car insurance) and its resale value.
The main advantage of a new car is that it benefits from the manufacturer's warranty, but it is more expensive to sell than a used car.
Conversely, the advantage of the used car, is of course, the price and the cost of the insurance, which are lower than for a new car. However, in addition to those sold in dealerships, a used car can have hidden defects and will certainly have a shorter life than a new vehicle. However, in some cases, buying a very recent used car can be a good alternative.
Regarding the auto loan, the interest rate of the credit is often much more advantageous for new cars while the interest rates for used cars are subject to variations according to the age and condition of the vehicle. . In addition, it should be noted that obtaining a loan for a new car is easier than for used vehicles.
In addition, for a used car, it is advisable to limit the duration of the auto loan as much as possible because the price of a car can drop by more than 15% each year, so if the repayment period is too long, the risk is to reimburse a car that no longer has resale value.
What are the advantages and disadvantages of the auto loan?
Unlike personal credit, the auto loan is a loan allocated to the purchase of a vehicle. That is, it is directly linked to the purchase of a vehicle and the loaned amount cannot be used for other purposes because the sale of the property is conditional on the granting of credit and the release of funds is linked to the successful completion of the planned transaction.
Conversely, the personal loan, is an unallocated credit, that is to say that the funds can be used at the convenience of the borrower.
However, in addition to this purchase constraint, the auto loan provides more security for the customer:
- If the credit is refused, the purchase of the vehicle is canceled.
- If the vehicle is not delivered, the credit and the sale of the vehicle are canceled and the borrower therefore has nothing to repay
- The auto loan rate is generally lower than that charged for the same loan amount and over the same term for a consumer loan.
- If the borrower cannot find a lender, he can cancel the sales contract without charge.
Likewise, in general, the borrower can have a higher amount of credit in the context of a car loan than in that of a personal loan and also benefit from a longer repayment period, the lender knowing exactly what the funds released will be used for.
On the other hand, in the event of theft or destruction of the vehicle, whether the credit contracted is a car loan or a personal loan, the monthly payments will have to be paid until the final expiry of the contract, in the absence of having taken out ad hoc insurance. .
In conclusion, the car loan is an easy-to-access credit, offered by various lending organizations, and which is aimed at everyone (young workers, family, senior) but before subscribing to this type of credit, it is imperative to ask the right questions in order to choose the vehicle that will not only meet all immediate needs, but also anticipate future needs while taking into account a major parameter: its repayment capacity.