You are about to acquire a new car, but are not sure how you are going to finance your car purchase? We explain here the different tracks and traps to avoid!
Financing options for a new car
During a car purchase, how to choose between using your savings and make a loan? What are the different types of credits that exist? Is a loan more attractive to a bank or a dealer? Here are some ideas for reflection.
- It’s already been a while since interest rates are low. Many then opt for a credit when making a car purchase. But low interest rates also mean that your savings do not bring you much more. The choice between debt and equity financing will therefore depend mainly on your financial situation and your desires.
- The classic car loan is very popular because of its attractive rates compared to an unallocated installment loan. Its operation is similar: after acceptance of your file by the bank (which includes proof of purchase of the vehicle), you will receive the funds and will have to repay in fixed and equal installments (which include interest and capital) over the entire duration of the loan. Some banks also offer you the possibility to borrow more than 100% of the purchase value to cover insurance costs, registration fees, etc. It should be noted that environmentally friendly cars can benefit from favorable rates, both in terms of credit, insurance and taxation.
- Another type of loan that has gained notoriety in recent years is the balloon credit. It allows to lighten the monthly payments: only part of the capital is repaid during the loan period, and the rest during the last monthly payment called “balloon”. The proportion to be repaid at maturity varies according to the duration but is generally at most 50%. Of course, the interest still runs on the amounts not yet repaid. Although this loan allows you to better manage your monthly budget, you must be sure to repay the remaining portion of the capital at the end. We may otherwise be in default of payment.
Auto loan 0%: what is it?
Some dealers offer very low rates for a car purchase, sometimes up to 0%. This method of financing seems at first sight interesting, since you would only have the capital to repay, and no additional interest to pay. But is this really the case? Never forget that borrowing money costs even when you think you are dealing with “free funding”. We are exploring here for you the “hidden” costs that can be associated with a 0% loan.
First of all, there is no free credit. The interest you will not pay on this loan will be post by the dealer. It is therefore a commercial gesture.
Since the dealership takes the cost of the interest charge, it will often limit the duration on which the credit can be contracted, so as to limit this cost. For a shorter period, your monthly payments can then become exorbitant.
The commercial gesture on the loan rate also means that the dealer will not give you extra gifts on the car:
It will not give you or any discounts on the vehicle. Yet the discounts you can expect on a new car can quickly exceed the interest you would save on a car loan in the short term. Is it really worth it?
In addition, if you want to sell your old car to partly finance the new, make sure that its value is not underestimated. This is another known procedure among dealers to offset the benefit given on the loan. Again, calculate well if you lose on the recovery of your old car as well as offsets the interest you save on the loan.
Opening a line of credit
Even if the interest is not your responsibility, the 0% car loan involves the opening of a line of credit. It will be registered in the records of Central Credit to Individuals, which could affect your chances of obtaining another loan. So there is no advantage at this level compared to a conventional car loan.
Finally, to give you a 0% loan, the dealer will ask you for a substantial down payment. You will have to have this amount available and agree to go without that to benefit from this type of loan.
Contrary to what one might think, a 0% auto loan is not without costs. Do not rely on appearances and calculate your potential earnings and shortfalls before choosing your financing method.