After a real estate purchase, the purchase of a car represents the largest purchase in a home, whether new or used. Households generally turn to a car loan solution. You will find the different modalities in this guide.
A car loan can be taken out with a car dealer, a bank, or a financial institution specialized in car loans.
What are the different types of auto credit?
- Personal loan : this is a type of consumer credit. It is not a specific loan for the purchase of a car. Indeed, this loan can be allocated regardless of the project of the borrower, purchase of a car included. This loan can go from 4000 $ to 75 000 $ and thus completely cover the purchase of a car. It is repayable generally over 5 years.
However, this credit can be dangerous for the purchase of a car because in the event of cancellation of the sale, the borrower must continue to repay his loan.
- The assigned credit : This is the most common credit for the purchase of a vehicle. The borrower must justify his purchase with a quote clearly showing the purchase price of the vehicle. The payback period differs depending on whether the vehicle is new or used. It is of the order of 7 years maximum for a new car and 6 years maximum for a used car. The borrower benefits from guarantees. If the sale is not finally made, the credit is automatically canceled and the borrower has nothing to repay. In addition, the latter has a right of withdrawal of 14 days from the signing of the contract. Finally, the borrower has no obligation to purchase once the credit has been signed; if he decides not to buy the vehicle in question, he will not be required to honor the loan.
- The car pack: The car pack has the advantage of including many terms concerning the vehicle: Credit, damage insurance, assistance in case of breakdown, problem or accident, maintenance, as well as the extension of the manufacturer’s warranty.
These auto packs usually benefit the borrower from lower interest rates, or less expensive insurance. This is their main function. Thus, the borrower will have to pay only one monthly payment for all the contracts subscribed. This allows you not to have to manage different credits.
However, the auto pack depends on dealers or credit agencies. The borrower will have to make sure to have compared well the offers present on the market as well as to subscribe to the services which he will really need.
- Leasing: Leasing, also known as Leasing with Purchase Option (LOA), is a type of loan that is assigned. It allows the borrower to rent a car for a period ranging from 2 to 6 years. At the end of the rental period, the renter can acquire the car if he requests it. That being said, he is not obliged to do so. It may as well buy the vehicle in question before the end of the lease, by exercising the purchase option.
With this type of credit, the borrower is not required to have a personal contribution. However, different criteria are studied to determine the cost of the loan: The price of the car at the beginning of the loan, its duration of the lease, the services included as well as the price of the car at the end of the lease.
- Long Term Rental (LLD) : This type of credit is very similar to Lease with a purchase option, with one difference: At the end of the vehicle rental, the borrower can not make a purchase request. In the long run, he never becomes the owner of the vehicle. However, all maintenance costs of the car are covered in the monthly installments of the loan. On the other hand, if the vehicle broke down, the borrower would immediately benefit from a new car.
This type of loan is interesting for people who want to change cars often. For example, if they have to travel many miles.
What are the different rates applied to auto loans?
The interest rates charged on auto loans vary particularly depending on the age of a vehicle. They are not fixed and are therefore different according to the financial organizations. However, we can differentiate two types of situation, depending on the age of the car. If it is a:
- New car: Buying a car can allow the borrower to choose the best vehicle and to have the choice of insurance. However, the total amount of the vehicle is much higher than a used vehicle. The monthly payments to be repaid are therefore larger and longer in duration; which leads to an increase in the interest rate charged by the banks.
However, this increase in the interest rate can be avoided by a significant personal contribution : This can allow the borrower to negotiate a lower interest rate because the loan will be shorter.
- Used car : second- hand cars being cheaper, interest rates should be lower because the repayment period of a credit is theoretically shorter. However, when a financial institution agrees to finance a used vehicle, it also takes more risks. Indeed, the borrower can end up managing a vehicle breakdown, or spend a significant amount for maintenance, and thus find himself in financial difficulty for the repayment of his loan.
This is why banks often pay their interest rates according to the age of a vehicle. Generally, the rates are higher when the car has been in circulation for more than 8 years.
Use auto credit simulators
In order to find the best auto loan according to the situation of the borrower and the state of the vehicle, it is possible to use online comparisons on many sites: guideducredit, besttaux, or directly on the sites of the banks concerned.
These comparisons ask the borrower what type of project they want, how much they want to borrow, and how long, ideally. Comparators will be able to estimate the monthly payments according to the financial organizations.
In order to simulate one’s auto loan, the borrower can also find out from his bank or a car loan broker who will find quickly and efficiently the best credit for his client. The simulation can be more personalized in its usual bank, because the borrower’s financial situation and history are better known. For this, it is preferable that the borrower has calculated beforehand its purchasing capacity as well as its debt ratio in order to know the maximum amount that he can ask.
These simulations can be very fast and the banks can agree in principle because, according to the law, the total cost of the purchase of the vehicle, the cost of the monthly payments and the repayment period are known as soon as a loan is closed..
What you need to know about regulating a car loan
The car loan is subject to special regulations derived from those used in a consumer credit to supervise credit and protect borrowers.
The law Scrivener : This law dates from 1978 and concerns car loans whose amount does not exceed 75 000 $ and whose repayment period is greater than 3 months. It was revised in 2010.
It includes an obligation of information from the credit institution: this law states that the contract must be signed after the sending of an offer by mail. From the receipt of this offer, the borrower has a cooling-off period of at least 15 days. Once the contract is signed, it also has a 14-day cancellation period.
In addition, the contract must comply with very specific rules, namely the identity of all the parties participating in the contract, the names of the guarantors, the mention of the nature of the property, the amount of the credit requested, the object of the contract as well as its date of issue.
The Neiertz law : This law dates from 1991 and complements the Scrivener law, and takes into account the over- indebtedness. With this law, the lender is obliged to keep a copy of the credit offer. If there is a problem of over-indebtedness on the part of the borrower, commissions are provided to decide on an amicable agreement.
Finally, this law allows banks and financial institutions to have access to a file of bank bans (the National File of Personal Credit Incidents – FICP) in order not to lend to a person already found in case of over-indebtedness.
The choice of different auto credit solutions depends on the use that the borrower wants to have of his car (owner or not), as well as the amount of the contribution. Whichever solution he chooses, he is protected by a specific regulation to the contraction of a car loan.
But like all credit, auto credit is an act engaging any borrower. The latter must check its repayment capacity before subscribing. Lastly, in order to benefit from the best possible car loan, do not hesitate to ask several financial institutions to negotiate the rates and play the competition.