How are monthly installments calculated or can I also finance a used car? We answer the most important questions about vehicle financing.
You can choose between three different forms of vehicle financing:
- Standard financing
- Balloon-payment financing
- Three-way financing
Traditional standard financing allows you to choose the duration of your financing agreement and decide how much of an initial payment you wish to make, and thus how high your monthly installments will be. In the case of balloon payment financing,, a high final (“balloon”) payment needs to be made at the end of the financing period. As a result, your monthly payment will be lower than the rate charged for standard financing. The amount of the balloon payment is set before you sign your financing agreement and is based on the residual value of the vehicle at the end of the financing period as calculated before the financing agreement is concluded. You can make the balloon payment as a one-time payment, or else you can take out follow-up financing to pay this final installment. The third possibility — three-way financing — is similar to balloon payment financing in that it also involves a balloon payment. The difference, however, is that you need to make an initial payment with this form of financing and you also have three options at the end of the financing period: You can make the final installment as a one-time payment or you can take out follow-up financing to pay it, or you can return the vehicle at the end of the agreement.
Your monthly financing payment depends on several factors. The first involves the financing variant you choose. Then there’s the question of how much the car of your dreams costs, and therefore what the total amount of your loan will be. To this must be added the effective annual percentage rate. Your monthly payment is also based on the duration of your financing agreement and an optional initial payment that you can make when you sign the agreement. In the case of three-way financing, your estimated annual mileage will also influence your monthly installments. You can add service products to any financing package as well — for example maintenance, a warranty, or insurance. Such an all-round carefree package will have a positive effect on your vehicle’s residual value. It also ensures reliable financial planning, as all the services you choose will be factored into your monthly installment.
Assuming the same interest rate and duration of financing, the monthly installments for three-way financing are much lower than those charged for traditional installment loans. That’s because with three-way financing, the balloon payment that you have to make at the end of the financing period amounts to the bulk of the loan that you took out. Three-way financing is therefore a good option in the following three cases: If you’re not sure whether you want to actually assume full ownership of the vehicle when the financing period ends. If you want to go easy on your budget and would therefore prefer to postpone the repayment of a substantial part of your loan. If you already know when you sign your financing agreement that you will have additional funds when the full loan comes due, and you will therefore be able to make the final payment without having to take out another loan.
The things they have in common:
With both leasing and three-way financing, you pay a monthly amount that is calculated on the basis of your planned annual mileage, the term of your leasing/financing contract, and the amount of any optional initial payment you might make at the beginning of your leasing/financing agreement.
With leasing, you return the vehicle to the lessor at the end of the leasing period — and this is the case regardless of whether you opted for mileage leasing or residual-value leasing. With three-way financing, on the other hand, you have three options when your agreement ends: You can pay the final installment (balloon payment) and assume complete ownership of the vehicle, you can take out follow-up financing to pay the final installment, or you can simply return the vehicle the way you would in a normal leasing agreement. The final installment is usually equivalent to the residual value of the vehicle at the end of the agreement period as calculated at the beginning of the agreement. As borrower, you can also organize the sale of the vehicle. If you are able to sell the vehicle for a price that is higher than the amount of the final installment, you can pay the installment and then use whatever is left over to make a one-time payment to finance another vehicle. If you want to return the vehicle, the procedure is the same as with a residual-value leasing agreement: If as a result of excessive wear or damage from an accident the sale price of the vehicle ends up being lower than the originally calculated residual value, you will have to pay the difference. Important note for business owners: Unlike the case with leasing, only the interest portion of your financing installments is tax deductible when you finance a vehicle. The value of the vehicle itself is written off over a certain period of time.
When you lease a vehicle, it remains the property of the lessor. When you finance a vehicle, you own it but it also serves as collateral for the bank throughout the financing period. In other words, the bank holds the vehicle title, which is then handed over to you after the loan has been paid off. From that point on, you are the legal owner of the vehicle.
All financing options are also available to you if you finance a used vehicle. As is the case when you finance a new car, you can also add service products such as our maintenance package, warranty package, or vehicle insurance package when you finance a used vehicle.
Seasonal financing is a special financing option offered to business customers whose revenue can fluctuate sharply throughout the year. Such customers operate in sectors in which their business depends on tourism or weather conditions, for example. In months when business is good, the financing payments are higher; when things get quieter, the customers benefit from a lower payment. Seasonal financing thus gives customers a certain amount of financial flexibility for investments in the off-season as well.
Loans are issued at a nominal interest rate. However, other costs and fees also come into play when a loan agreement is concluded, and the figure for the effective annual interest rate takes these costs and fees into account. In other words, the effective interest rate is a percentage calculation based on the nominal interest rate and all other costs and fees associated with the loan. Banks are required to provide information on the effective interest rate they charge.