Car financing: Calculate car financing

Whether new or used – the purchase of a car usually costs a lot. This does not only apply in times of diesel guests. For many consumers in Germany, financing remains the only way to put a car in their garage. But which form of car financing is the right one? A loan from the bank? Car leasing? Financing through the dealer? An editorial over at

What different forms of financing are there and where are the individual advantages and disadvantages? We have put together the most important aspects of car financing for you in this guide.

Car financing – different ways lead to the goal

Car financing - different ways lead to the goal

Nowadays, different models of car purchase loans are offered. Ultimately, every type of financing is about not having to pay the entire purchase price immediately but spreading the financial burden over a longer period of time. This ends the similarities of the financing models because they differ significantly in the details.

General information about car financing

There are two important principles to consider when car financing: First, the monthly charge has to be calculated in such a way that it has to be borne permanently and the financial planning does not get out of hand in the first unforeseen incident. Second, the repayment period should not exceed the planned useful life.

The classic: installment loan

The bank’s classic installment loan is still a popular form of car financing. The buyer usually pays part of the purchase price in cash or by the trade-in of his end-of-life vehicle and finances the remaining amount via a loan. This loan is repaid in constant monthly installments.

The newer variant: installment loan with the final installment

Another variant of financing a motor vehicle has been offered for many years. The loan has a term that is significantly shorter than the life expectancy of the car, for example, four years. The loan is calculated in such a way that only the purchase price of the car minus the estimated current value at the end of the loan term is paid during this term.

The monthly installments are therefore significantly lower than with a traditional installment loan, however, at the end of the term, an open amount remains, which ideally corresponds to the current value of the car. This can then be repaid directly in the form of a final installment, realized by selling the car or further financed through follow-up financing. This is why this is also referred to as “3-point financing”.

Your rights and obligations in funding

The vehicle of the bank serves as security for all forms of financing, which results in some obligations. First of all, comprehensive insurance is compulsory, which hardly requires any further explanation. In addition, prescribed inspections must be observed.

In short: everything must be done to avoid an unnecessarily rapid loss of value. In return, the vehicle user can rely on being able to use the vehicle without restriction, apart from any contractually agreed limits on the annual mileage. The bank remains the owner of the vehicle, but as long as the customer fulfills his contractual obligations, this does not restrict him.

Financing costs

Here consumers have a clear advantage. Legislators can make credit comparison easier by requiring banks to provide the annual percentage rate. In contrast to the borrowing rate, the annual percentage rate already includes all the ancillary loan costs when buying a car.

Tailor-made car financing from the dealer

Tailor-made car financing from the dealer

Very few private customers are able to pay the bill for their new car in cash or by bank transfer. Manufacturers, dealers, and car dealers, therefore, offer their customers special car financing models that can be individually adapted to the specific situation of the buyer within a certain framework. There are essentially three different financing methods that will help you to fulfill your dream of a new car.

Variant 1: The classic installment financing

The contact person for this is the customer’s house bank. Alternatively, direct banks and of course the manufacturer or car banks behind the dealers offer such installment loans.

The essential key data of such financing are composed of the purchase or loan amount, the term and the effective annual interest rate. The effective annual interest is first added to the invoice amount and then this total is divided into the number of desired monthly installments.

Our tip: Here customers and dealers have reliable monthly rates and a predetermined period. In addition, the monthly installments can be adjusted to personal circumstances by choosing the term and using the lowest annual interest rate possible.

Variant 2: balloon financing

The balloon financing model offers considerably more scope for private customers. The balloon financing is made up of three components: a down payment upon conclusion of the purchase contract, the monthly installment payments and finally a final installment. The high flexibility with this financing model provides, for example, that a down payment is not absolutely necessary.

In addition, the amount of the individual monthly installments can, of course, be selected individually. In contrast to a classic car financing, balloon financing does not have to finance the full purchase price (plus annual interest). Due to the optional down payment and the relatively high final installment, only a loan amount equal to the monthly installments is required. With such balloon financing, the buyer benefits above all from the particularly low monthly installments.

However, it should be noted that in addition to the monthly credit installments, the customer must also raise additional funds in order to save the final installment or to pay this by selling the vehicle. The current value of the vehicle should match the amount of the final installment.

Our tip: Balloon financing is often the better alternative, especially for customers with a rather low, but still regular income (for example, young adults or young families) because the down payment and the monthly charges are relatively low. In addition, some banks or car dealers also have the option of financing the high final rate using a separate loan. This is one of three variants of the so-called three-way financing.

Variant 3: The three-way financing

The final rate of balloon financing is – despite all the advantages – often the highest hurdle of this model. That is why customers are often given the option of three-way financing after the installment payments have been made. The easiest choice for everyone involved is, of course, the full payment of the vehicle by transferring the complete closing rate. As with any other financing, the buyer then receives all vehicle documents and becomes the owner of the car.

Also possible: finance the final installment with a new loan (follow-up financing). Since the actual monthly installments for financing have already been paid, the monthly charge is also manageable in this case.

The third option of three-way financing provides for the return of the car to the bank or dealer after the installment payments have been made. Instead of a one-off or financed final installment, the car is then returned at its residual value.

Our tip: This variant is mainly suitable for cool computers because criteria such as the current value, the previous mileage or the current condition (damage, accident, scratches, wear, etc.) are decisive. In the worst case, this third option is, therefore, a loss-making transaction for the customer compared to the other two options.

With a dream car loan – the advantages and disadvantages of financing

With a dream car loan - the advantages and disadvantages of financing

The desire for your own car can arise for a variety of reasons. Be it a practical combination for strollers and the like or the long-awaited sports car – both are often so expensive that a cash payment is only possible after years of saving. Financing with credit can end the wait. However, it must be borne in mind that a loan not only brings advantages but also obligations. Financing should therefore always be carefully considered.

Advantages of loan financing

In contrast to leasing, in the case of loan financing, the vehicle becomes the property of the customer after payment of the last installment. If you want to finance your car with a loan, you have several options.

Disadvantages of loan financing

A disadvantage of vehicle financing can be that the customer uses it to finance the loss in value of the vehicle. An expensive business, especially for new cars.

Term-dependent rates

The amount of credit installments to be paid each month depends on numerous factors. With the short term, lower interest rates can be expected, but higher rates.

On the other hand, low credit rates achieved through the long term are associated with higher interest rates, since the long term means a higher risk for the bank. In addition, the level of interest at some banks depends on the creditworthiness of the customer.

Attractive conditions only for shopkeepers?

If you choose a particularly attractive financing model from the manufacturer’s bank, it may be that it is only offered for certain vehicle models. Since such financing offers are a means of sales promotion, they are sometimes offered for models that sell very poorly or that are to be repositioned on the market.

It is always worth researching in advance, not least so as not to buy a vehicle model with very poor resale value. If you choose the balloon financing model with regard to anticipated special income, you should be fairly certain about the arrival of this income. If these fail to materialize, follow-up financing may be necessary at far less favorable terms.

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