Car Financing: Different Options

There are several ways to finance a car. Besides dealer leasing, you can choose a classic installment loan or a three-way financing deal (a balloon-style plan common in Germany). For businesses, car leasing is especially interesting.

The best-known forms of car financing include:

  • Installment loan from your own bank
  • Dealer financing
  • Three-way financing
  • Car financing through leasing

The Auto Loan

If you'd like to buy a car, you can use a classic installment loan. The money your bank or an independent lender provides can generally be spent however you like. You then pay it back in installments, which can usually be set flexibly. In most cases, the longer the term, the lower the installments. A requirement for this kind of loan is good creditworthiness. The borrower has to show a regular income and, where applicable, additional collateral. If you have entries with Schufa (Germany's credit bureau) or are job-hunting, you won't get an installment loan. Financing a car through your bank is attractive because of the favorable terms. Banks usually offer a range of loans with flexible conditions. The downsides are the high interest rates and the collateral required. If you go with a classic installment loan, you can save even more by comparing offers. Sometimes dealer financing is the better alternative.

[caption id="attachment_517" align="aligncenter" width="424"]Dream guy with an expensive car Financing[/caption]

Dealer Financing

The classic auto loan is taken out directly with the seller. This kind of dealer financing usually offers lower interest rates than a loan from your own bank and lets you reduce the installments with a down payment. If you pay part of the bill at purchase, your installments go down. Customers with weak credit often have the option of getting dealer financing. However, that depends on the dealer and the value of the vehicle. There is also less flexibility when it comes to choosing an offer.

Three-Way Financing

With three-way financing, the vehicle is financed through a down payment and monthly installments. At the end, the customer can either return the car or pay off the remaining balance in installments or in cash. Undecided customers save money with this model and get time to make up their minds. Three-way financing also has the advantage of spreading the financial burden over a long period. If you opt for a down payment, monthly installments and paying off the remaining balance at the end of the term, you can count on manageable costs.

Leasing a Car

With leasing, you don't buy the car, you just borrow it. Only the vehicle's loss in value plus any fees is financed. That lowers the monthly payments and means less collateral is required.Leasing is mainly used by businesses. The payments can be written off as business expenses and your own credit line isn't affected. Private customers benefit from a leasing model with exit clauses and low monthly payments.