How does the financing of a car work

Car financing: what is the cheapest way to finance my car?

Financing a car is the most common reason for an installment loan

Financing the car is widespread in Germany. According to a market study by GfK, 45% of all new private cars in 2018 were financed through an installment loan. For used cars it was 32%. This makes buying a car the most widespread reason to take out an installment loan: 59% of all installment loans are used for car financing. On average, buyers finance a new car with € 18,200 over 48 months, used cars with € 12,000 over 51 months. These figures make it clear that financing a car with a loan has long been a thing of the past.

This is the average amount of car loan that is taken out for a new or used car

 New carused cars
Loan amount18.200 €12.000 €
running time48 months51 months

Source: GfK, Market Study 2018 - Consumer and Vehicle Financing

How can I finance a car cheaper: with a car loan, 3-way financing or car leasing?

In the following we will introduce you to the three types of financing car loan, 3-way financing and leasing and explain the advantages and disadvantages of the various financing offers for the car.

1st option: buy the car in installments with a classic car loan

A car loan is a purpose-tied installment loan, i.e. a loan that is paid off monthly in installments. Most banks offer better conditions for car financing than for a normal installment loan. The reason for this is the higher security: During the term, the borrower must deposit the registration certificate Part II - formerly the vehicle registration document - with the bank as security. You cannot sell the car during this time. This is prevented by an official blocking notice until the loan has been paid off in full. However, if you as the borrower can no longer repay the financing for the car, the bank can sell the car and thus settle the remaining debt.

Before you decide on this form of car financing, compare different offers with one another. The loan costs vary greatly between the individual providers.

Car loan comparison

Caution: Zero percent financing can be expensive

Many dealers also offer supposedly cheap car financing, a so-called zero percent financing. With this, you pay off the vehicle in monthly installments without any interest being charged. In this case, however, a cash discount is excluded, which is why this type of car financing with credit is often more expensive than paying in cash. In addition, there is usually no statutory right of withdrawal for car financing without interest. This means that the loan must also be paid off if the vehicle has defects and you could actually withdraw from the purchase as a result. However, this is only possible for interest-bearing loans (BGH judgment September 2014, Az. XI ZR 168/13). If things go bad, you are left with a defective vehicle and have no legal recourse.

2nd option: Pay off the car in low installments with 3-way financing

3-way financing (also called balloon financing) is another way of financing a vehicle. Here a deposit is due first. During the relatively short term, usually between 2 and 4 years, you then pay comparatively low monthly payments. At the end of the term, you have the choice: you can replace the car financing with a final installment, or you can return the car to the dealer - provided that a certain number of kilometers has not been exceeded. If you don't have enough money to pay the relatively high final installment, you can use follow-up financing to settle the final payment.

3-way financing

3rd option: Rent the car for a monthly rate with car leasing

With car leasing, you only rent the car. The lessor is a car dealership, a leasing company or the manufacturer directly. For the provision of the car you pay a monthly installment, which is usually less than a loan installment for a comparable installment loan. A leasing contract can offer advantages, especially for the self-employed, because the leasing installments are tax deductible in most cases. In addition, the costs for maintenance and inspection lie with the lessor.

Car leasing

How do I find the right car financing?

So there is no shortage of car financing offers. Which one is right for you, however, is very individual and depends on several criteria:

  • Liquidity: How much cash do you have available for the purchase? Can you draw on reserves at short notice?
  • Ownership:How important is it to you to be the owner of the car and to be able to make flexible decisions about modifications, maintenance or repairs to your vehicle?
  • Driving behavior: Do you know how many kilometers you will cover each year?
  • Employment Type: Are you employed or are you self-employed?

Which car financing suits me?

The following flow chart should serve as a decision-making aid and make it easier for you to decide which car financing is best for you. It picks up the two main aspects of liquidity and ownership and guides you to the right result.

Should I finance my car through the dealership, branch bank or direct bank?

Once you have found your form of financing, the next step is to compare different offers. You can take out car financing directly at the dealership, via a branch bank or online via the direct bank. You can find out below where the advantages and disadvantages of the various financing partners are.

Financing the car directly at the dealership offers advantages

Car financing through the dealership has the advantage that you can take out the financing directly on site. There are no additional bank appointments and further paperwork. In addition, you usually receive the approval for the car financing directly in the sales talk and thus avoid uncertainties.

Finance the car through the branch bank or direct bank and negotiate a discount at the dealer as a cash payer

Nevertheless, it can be cheaper to finance the car through an independent branch bank or direct bank. If you have the amount in your pocket that you have financed at the bank, you can pay cash at the dealership and expect a discount. As a rule, a discount of up to 20% from the list price of the car is possible.

Also check the offers from direct banks. Car financing online is often cheaper than financing the car through the branch bank. This is because direct banks employ fewer staff and do not operate branches. You pass the resulting savings on to your customers.

Car finance with or without a deposit, which is better?

If you can afford it, you should choose down payment auto finance. The deposit serves as security for the lender and has the following advantages:

  • With a down payment, the interest costs of car financing decrease
  • shorter term of the loan
  • lower debt risk as the loan amount is lower

In the case of car financing without a down payment, the lender adds the lack of security to the installments, so that car financing without a down payment is 1 to 2% more expensive. In addition, you must have a good to very good credit rating and must not have any negative SCHUFA entries in order to be able to take out car financing without a down payment.

Checklist: Tips and Tricks for Car Financing

When negotiating prices with the retailer, it is advisable that you obtain comprehensive information in advance and compare different offers with one another. Here are some basic rules for negotiating a discount at a car dealer:

  • Act decisively as a cash payer
    The correct attitude is: you have the money, the dealer wants it. Not: He has the vehicle, you want it. Be brave; if you don't dare to bargain hard, you pay the list price.
  • Be aloof
    Under no circumstances should you show the seller that you are enthusiastic about a particular vehicle.
  • Check the vehicle
    Point out alleged weaknesses of the vehicle - even if you don't take them too seriously yourself.
  • Don't let it show you
    Never show during the negotiation that you are satisfied with the current success of the negotiation.
  • Haggle
    Negotiate any additional cost items, such as transportation costs, approval or the like.

Have you saved so much that you can finance your new car with equity? Then you have to do the math: If the dealer's cash discount is lower than the interest income that your investment brings in, you should leave your savings behind - and finance the new car with a car loan, for example.