Financing and leasing: The most important terms All definitions to look up

Financing and leasing are the classic models for purchasing a car.With our glossary we will guide you through the most important terms like sales risk or balloon-payment financing.

 

The easiest way to get a loan or leasing contract for your dream machine is to go directly to the automaker’s captive bank. Unlike traditional full-service and savings banks or online banks, automotive banks specialize in loans for motor vehicles. At automotive banks you can add various service modules to your monthly leasing or financing payment, including tire service, maintenance, warranty packages, and motor insurance. In this way, you cover all of the costs with a single monthly payment.

For an auto loan, an automotive bank or other type of bank provides you with a certain amount of money, which you have to pay back at the end of an agreed-upon time period. There are various types of auto loan. A traditional form is that of the installment loan, in which you make the same monthly payments in order to pay back the loan over a certain period of time. The payments include the repayment of the debt as well as the interest that is charged by the bank. Another popular type of credit when purchasing a vehicle is the balloon loan, in which the customer pays not only the monthly installments, but also a higher final payment at the end of the contract’s duration.

A balloon loan is a type of financing, in which a higher final payment (the balloon payment) is made at the end of the contract’s duration. The final payment corresponds to the calculated residual value of the vehicle and can make up more than half of the entire volume of the loan, depending on the contract’s duration. A typical balloon loan is a final payment financing or a three-way financing.

Final-payment financing is a kind of balloon loan, in which the monthly payments are lower than in a standard financing agreement, but a high final payment has to be made at the end of the contract’s duration. At the end of the contract’s duration, you can either make a final payment or conclude a follow-up financing agreement.

Before a bank approves a loan or leasing deal, it will first examine your credit worthiness. In Germany, the bank will obtain this information from the Schutzgemeinschaft für allgemeine Kreditsicherung (Schufa/General Credit Protection Association). The Schufa gives banks a score that forecasts how high your credit risk is. If your credit worthiness is negative, your application for a loan is generally rejected.

The effective interest rate is a calculation based on the nominal interest rate and all other applicable costs and fees associated with the loan. The annual percentage rate provides you with an overview of all of the costs that ensue from a loan and enables you to more easily compare the offers from different banks.

Excess kilometers are found in mileage leasing. At the beginning of such a contract, the lessee specifies a number of kilometers he or she plans to drive each year. If you drive more kilometers during the leasing period than stipulated, you will have to pay a surcharge for these excess kilometers at the end of the contract’s duration. It is already stipulated in the contract how much you will have to pay for each additional kilometer you drive. Before you conclude such a leasing agreement you should estimate as accurately as possible, how many kilometers you drive each year. The surcharge for excess kilometers at the end of the leasing period is generally higher than you have to pay monthly for the agreed-upon mileage.

When you lease a vehicle you generally return it once the agreement expires. Because you don’t have a contractual purchasing option when you lease a vehicle, the lessor has to give his permission for you to buy the automobile after the leasing period is over. Should be thinking of purchasing the vehicle after the lease expires, we recommend you to choose three-way financing instead. At the end of the term, this financing deal lets you choose whether you want to return the vehicle or keep it. If you choose to keep it, you have to pay a higher final installment. If you can’t pay this amount in full, you will need further financing. You should note, however, that the loan conditions of follow-up financing can differ from those of the original agreement.

In full-service leasing, you book service modules from the lessor that are appropriate for the leased vehicle. These services can differ depending on the provider. Generally, full-service leasing deals include services such as maintenance and inspection work, motor vehicle taxes, insurance, replacement tires, TÜV inspection costs, and a breakdown service. In most cases, the service modules can also be booked individually for the vehicle leasing contract. In full-service leasing, you make a monthly payment that covers the costs of the vehicle leasing as well as those of the services.

When leased or financed vehicles become a total loss or are stolen, fully comprehensive insurance generally insures the vehicles’ replacement value. However, this value can be lower than the outstanding leasing or financing payments. Gap insurance covers this difference so that the policyholder doesn’t have to pay such expenses out of his or her own pocket.

You can make an initial payment whenever you finance or lease a vehicle. The higher the initial payment, the lower the following monthly costs are. An initial payment is generally optional and not obligatory.

The interest that is charged on a loan can be depicted in two ways: as the debit interest, which shows how high the interest rate is for a loan, or as the effective annual interest, which includes all of the costs and fees for a loan and serves as a basis for comparing loans.

In mileage leasing, a kilometer shortfall is the counterpart to excess kilometers. If you drive fewer kilometers during the leasing period than stipulated, you will get money back for this kilometer shortfall at the end of the contract’s duration. The amount you get back per kilometer is also stipulated in the contract. However, you should note that the money you get back for a kilometer shortfall is mostly lower than the surcharge you have to pay for excess kilometers.

If you want to compare leasing offers, you need a comparative value: the leasing factor. It evaluates the conditions of a leasing offer and serves as a tool of comparison. The leasing factor is calculated on the basis of the monthly leasing payments and the gross list price: The monthly payment divided by the gross list price and multiplied by 100. The lower the leasing factor, the better the offer.

The amount of the leasing payment is calculated differently for kilometer leasing than for residual value leasing. Whereas the leasing payment for kilometer leasing depends on the vehicle’s value, the duration, and the agreed-upon number of kilometers, the monthly payment for residual value leasing is dependent on the vehicle’s residual value at the end of the contract. However, political decisions such as driving bans, subsidies for new vehicles, and rapid technological developments can negatively affect the residual value of a leased vehicle during the contract’s duration. In residual value leasing, the lessee is responsible for the residual value and has to cover any difference at the end of the contract’s duration. In the case of kilometer leasing, you have to pay an agreed-upon surcharge for each kilometer that you drive beyond the stipulated number. If you drive fewer kilometers, you correspondingly get money back. However, you should note that the surcharge you pay for excess kilometers is mostly higher than the money you get back if you drove fewer kilometers than was agreed upon (kilometer shortfall).

Many manufacturers not only produce automobiles, but also offer appropriate financing products through their own leasing companies and automotive banks. The manufacturers’ own leasing companies are referred to as captives. They are generally restricted to the respective manufacturer’s brands.

Leasing companies that aren’t subsidiaries of automakers are referred to as non-captives. They offer vehicle leasing irrespective of the brand.

Mileage leasing is the most common form of leasing. At the beginning of the leasing period, you only have to set the duration and the number of kilometers that you plan to drive with the vehicle during this time. The third factor that is used to calculate the leasing payment is the vehicle’s gross list price. The greater the number of kilometers, the higher the monthly leasing payment is. Before you conclude such a leasing contract, you should therefore be able to estimate how often you will probably drive the vehicle. If you drove more kilometers than was agreed upon at the beginning of the term, you will have to pay a surcharge for the additional kilometers at the end of the leasing period. This surcharge per additional kilometer is stated in the leasing contract. Conversely, you get money back at the end of the contract if you drove fewer kilometers during the leasing period than was agreed upon.

A loan is paid back to the bank in fixed monthly installments. The monthly installment consists of the interest and the repayment of the loan. Besides the loan’s amount, its duration also affects the monthly installments. The longer the duration, the lower the monthly payment.

Financing and leasing are not only provided for new vehicles, but also for preowned ones. Because of these vehicles’ lower purchase price, the monthly payments and any final payment at the end of the contract’s duration are lower as well.

Leasing is not only provided for new vehicles, but also for preowned ones. Because of these vehicles’ lower purchase price, the monthly payments are lower as well. However, you should note that the manufacturer’s warranty may not cover the entire leasing period. In this case, we recommend you get an optional follow-up warranty, which you can conclude with the automotive bank, and a maintenance package for additional services, replacement tires, and motor insurance.

The repayment is the loan a borrower pays back to a bank by making monthly payments over a fixed period. The interest that is calculated on the residual debt is added to the agreed-upon repayment.

With residual-value leasing, the residual value of the vehicle at the end of leasing period is calculated before the leasing agreement begins. This value depends on the length of the leasing period, the mileage, and the projected loss of value of the vehicle during the leasing period. The monthly leasing payment is calculated on the basis of the residual value. Although the monthly payments are often lower for residual value leasing than for kilometer leasing, the lessee bears the risk if the residual value at the end of the contract’s duration is not as high as originally calculated. In this case, the lessee has to pay the difference. Such a situation could occur if the leasing period has a duration of more than one year, for example, and political decisions made during this time affect the vehicle’s residual value — e.g. driving bans in inner cities, subsidies for new vehicles, rapid technological developments.

After a three-way financing agreement ends, you decide whether you want to return the automobile to the automotive bank or the dealership (which generally resells it at a preowned vehicle exchange) or obtain full ownership of the vehicle by paying the final installment so that you can sell it yourself. However, in this case you bear the sales risk yourself and everything is dependent on your negotiating skills.

A special repayment is an extraordinary payment that is not part of a financing agreement’s monthly payments. A special repayment reduces the total amount that has to be repaid and thus shortens the duration of a loan. However, a bank can charge a prepayment penalty for the interest it loses in this way. You should always calculate whether a special repayment is worth it for each specific case.

The contract’s term specifies the number of months over which the loan is to be repaid. Such periods generally extend from 12 to 72 months. The longer the duration, the better the costs are distributed and the lower the monthly payments. However, longer durations cause the costs of borrowing to rise because interest has to be paid for a longer period. Before you take out a loan, you should calculate various durations so that you can find the right solution for your budget, involving relatively low monthly payments and reasonable borrowing costs.

The leasing duration specifies how long you can use the vehicle. The leasing period is mostly between 24 and 48 months. It should be noted that the monthly leasing payments are lower the longer this period is. However, you should not conclude a leasing contract that is too long, because it’s rarely possible to withdraw from a leasing agreement early. If you want to keep a vehicle for another year or longer and thus extend a leasing contract that is about to expire, you can often do that by means of follow-up preowned vehicle leasing. This is a popular alternative to the leasing of new vehicles, especially in economically difficult times.

Three-way financing is a kind of balloon loan, in which you make monthly payments as well as a higher final payment at the end of the contract’s duration. This final payment generally corresponds to the residual value of the vehicle at the end of the agreement as calculated at the beginning of the contract. You can reduce the amount of the monthly payments by making an initial payment at the beginning of the contract’s duration. With this type of financing, you can decide at the end of the financing period if you want to pay the final installment and assume complete ownership of the vehicle. Alternatively, you can take out follow-up financing to pay the final installment and keep the vehicle, or you can return the vehicle to your dealership at the guaranteed residual value.

According to German law, the holder of a vehicle has control over it. However, he or she is not the owner from a legal standpoint. Leasing is an example of this. The lessor is the owner, while the lessee is the possessor and holder of the vehicle.

You are a vehicle’s possessor and owner if you finance it with a loan. However, you transfer the right of ownership to the bank as collateral throughout the financing period. As a result, the vehicle registration documents are kept by the bank until the loan is fully repaid. Once this is done, you become the vehicle’s legal owner.

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