In the eyes of many people – especially men – the most important asset of the UK people is the car. And it’s no secret that most people are most willing to take out a loan for it – either through a special car loan from the bank or via financing from the chosen car dealer. But what is the better alternative for the car buyer?
In most cases, the cheapest way to buy a car is to pay the purchase price in cash. But this is not always possible. For example, because the reserves for this are missing or the costs for the new car exceed the saved assets. Therefore, many car buyers are confronted with the question: Do I take out a loan to buy a car at the bank or the dealership?
Car dealerships work either with their own banks or with the banking institutions of the car manufacturers. Often car buyers can look forward to particularly favourable conditions for a loan there. But financing through the car dealership also has its pitfalls. For example, when balloon financing is offered, where you can profit from low monthly installments, but often have to pay an enormously high final installment.
In addition, the banks of car dealerships often do not allow you to pay a partial amount directly in cash at the time of purchase and thus reduce the actual loan amount. So the question arises how to drive cheaper. With a personal loan from your own bank or financing at a car dealership.
Possible car loan variants at the bank
Instalment loans for car financing from the bank or online portals are often cheaper than financing offers from the car dealers’ house banks. Two credit models stand out in particular:
- The earmarked instalment credit: For loans taken out for a specific purpose, banks often offer more favourable conditions than for pure instalment loans. The banks regard the intended purpose of such loans, in the case of car financing i.e. the car, as security in the event of payment defaults and personal insolvency. In contrast to three-way loans from car dealerships, there is no final instalment for earmarked loans – and you can benefit from other advantages such as possibly free special repayments. By taking out an earmarked loan from their own bank, car buyers can calculate their monthly expenses well, even though the installments can be quite high, for example with full financing or short terms.
- The non-purpose loan: the conditions of private loans are often worse than those of earmarked loans for car financing because of the lack of collateral. However, they are a good opportunity to benefit from being able to pay cash at the car dealership. If you have the loan amount disbursed, you can pay for the car locally at the full price and still have the advantage of more favourable conditions than in the car dealership on your side. And another plus point is offered by private loans to finance a car: If you can make a down payment on the car from your savings, you only have to take out the difference as a loan. This reduces the instalments and the overall financial burden.
Both types of car financing by means of instalment credit, whether earmarked or not, are generally not offered by car dealerships. Although the absence of a down payment and a lower annual percentage rate of charge from car banks may sound tempting at first. However, this supposed advantage is often quickly cancelled out by higher repayment rates and especially the final instalment.
How and where should one finance a car purchase?
Ideally, the car buyer is able to make at least one down payment from his own capital assets. If you can even pay the entire purchase price in cash, you can look forward to an average saving of 30 percent. If this is not possible, it is better to take out an earmarked instalment loan for the remaining amount (purchase price minus down payment), as offered by credit portals on the Internet and house banks. In order to profit from the best possible conditions, a comparison should definitely be made and attention should be paid to the estimated term, the interest rate, the amount of the installments, as well as the conditions for special repayments.
A full financing with no down payment should only be used when other possibilities are exhausted. But even in this case, instalment loans from independent banks can be the cheaper alternative, so that although you have to take out a financing loan, you are not tied to the car dealership’s bank, which often demands final payments at the end of the term. Here too, it is worth comparing different lenders.
The offer of the car dealership banks should only be taken up in exceptional cases. And in general, one should not sign a car purchase contract hastily, but rather have the documents sent to you for inspection if possible or at least ask in detail about the conditions of the financing in advance and compare them in detail with those of independent earmarked instalment loans before signing.