Wondering about buying a car for a loan, but you do not really know what a loan is, what are its types and – most importantly – can you afford it? We will advise you on what to pay special attention to before signing a loan agreement.
What is a car loan?
Car loan (otherwise automotive) is a loan granted for a specific purpose – purchase of a vehicle. Most often it is taken to buy a car (new or used), but it can also be used as a means of financing the purchase of a motorcycle, scooter, tractor, camper (or caravan), speedboat or construction machinery.
You can apply for a car loan not only at the bank, but also directly at the authorized car dealer with whom you plan to buy a vehicle. Often, such loans are cheaper than banking, and additionally allow negotiating an attractive discount on the car.
Thanks to the fact that the car loan has several variants, it can be easily adapted to your individual needs and financial possibilities.
Types of car loans:
Standard – with a monthly principal and interest installment, concluded for a specified period (maximum 10 years).
- One-time – recommended to people who have half the amount necessary to purchase a car. The remaining amount is paid eg after one year (the so-called 50/50 or 60/40 loan). An undoubted advantage of this type of financing is the lack of interest.
- Balloon – with low monthly installments covering 80% of the car’s value. The last installment is 20% of the vehicle’s value. No self-payment is required for this type of loan.
- Repaid in equal monthly installments or in decreasing installments (with each month lower and lower, however, it must be remembered that the first installment is very high in this case).
- Operating on the basis of consumer leasing – during the term of the loan agreement, the customer repays the low installments covering only the costs of the loss of value of the vehicle. After the end of the contract, you can buy a car (for a fairly high amount) or the lender does.
What determines the creditworthiness?
Many factors affect your credit rating, such as:
- credit history at RetroDatabase,
- monthly net income (after paying off all current liabilities together with the forecasted loan installment),
- the amount of monthly financial obligations,
- type of employment and type of contract – some banks do not require certification from the employer, using the so-called simplified procedure; instead, they often raise their own payment threshold, e.g. from a dozen to several dozen percent,
- household size – number and age of family members,
- the amount of own contribution (although this is not always required),
- the type and condition of the vehicle you want to buy.
How much does a car loan cost?
The cost of a car loan depends on many circumstances, such as interest rates, bank commission, and specific loan parameters. How much you actually pay for a car loan is determined by APY. What is that?
APY is the real annual interest rate that represents the total cost of the loan. Its value includes both the nominal interest rate on the loan (depending on current interest rates) and all other costs borne by the borrower (eg bank commission). Currently, the maximum nominal interest rate may amount to 12% (the interest rate is limited by law and is four times the lombard rate. The lombard rate as of today amounts to 2.50%).
The following factors influence the amount of APRC, in addition to the current interest rates:
- bank commission,
- type and condition of the car – the older the car, the higher the interest rate,
- borrower’s creditworthiness,
- loan amount and crediting time.
If you take a loan worth PLN 30,000 with a contract for a year, a monthly installment of PLN 2,800 and a bank commission equal to 2% of the loan value, you will pay PLN 4,200 for the loan itself.
How to count it?
First, you need to calculate the interest costs – the difference between the amount due (installment amount and the number of installments) and the principal amount, that is: PLN 33,600 – PLN 30,000 = PLN 3,600. Later, you have to calculate the total cost of the loan (the sum of the interest cost and other fees – in this case commission), i.e. PLN 3,600 + PLN 600 = PLN 4,200.
To sum up – taking a loan for PLN 30,000 a year, you must give the bank PLN 34,200 in total.
If your loan is more extensive, it is best to use one of many online calculators or loan comparison engines, eg this one .
What do you need to remember when signing a loan agreement?
Before signing a loan agreement, it is worth analyzing it carefully, and in case of any doubts, contact a banking advisor who will explain all issues that raise your concern. Especially look at the provisions regarding:
- general terms and conditions of the loan – the amount of the APRC , repayment terms together with information on the consequences of non-repayment, etc.,
- how to withdraw money – once or in parts,
- reservations regarding the conditions for the loan to be activated, such as the necessity to purchase insurance or other bank products,
- the amount of commission for early repayment of the loan.
Remember that no matter what commitment you sign, you can withdraw from the contract within 14 days of signing it, without giving a reason.