What is auto loan?
The car loan, also called car loan, is a payment solution to finance the purchase of a vehicle, whether new or used. It belongs to the category of consumption credits. But since the auto loan is exclusively reserved for the financing of a vehicle, it is a particular consumption credit: an assigned loan. However, another category of auto loan can be offered by the financial institutions, the personal auto loan.
- The auto loan assigned
The assigned loan is for the financial institution called the lender to give the borrower a sum of money specifically intended to finance the purchase of a particular property. This means that to be legally valid, the credit must be used only to finance specifically and exclusively the good for which it was concluded. It will not be possible for the borrower to buy a property other than the property mentioned in the contract that gives him the credit. Thus, for the auto loan, the borrower can therefore buy only one vehicle, to the exclusion of any other type of property. If the borrower buys something other than a vehicle, the credit he has just made will not be valid. As a result, the borrower will no longer be able to benefit from the payment facilities offered by the car loan.
Although the auto loan is used in particular to finance the purchase of a car, the concept of vehicle is not restricted to that of automobile, car. Indeed, with a car loan it is possible to finance the purchase of a motorcycle, a scooter, a boat, a caravan, a camper etc. It is called auto loan by convenience because in most cases people use it to buy a car. In addition, the condition of the vehicle does not matter for the car loan. Thus, the borrower can just as easily use the car loan to finance the purchase of a new vehicle than a used vehicle.
- The personal auto loan
The personal loan is for the financial institution to give the borrower a sum of money without the borrower having to justify the good he will buy afterwards. The borrower will be able to buy his vehicle as well as additional equipment or his gray card for example. The borrower is free to use his personal auto loan as he sees fit.
Whatever its form, the auto loan falls under the category of consumption credits. The auto loan is then subject to the same limits as those of the consumer credit. This means that the maximum amount that can be granted to finance the purchase of a vehicle is 75,000 euros. Similarly, the car loan must also provide for a repayment period of at least 3 months.
Once the auto loan is concluded, the borrower will have to repay monthly, in the form of monthly payments, a portion of the borrowed amount, called “capital”, and interest. To obtain the total cost of the loan, simply add the price of the insurance to interest and ancillary costs.
Whether it’s an affected auto loan or a personal auto loan, upon the conclusion of the loan agreement, the borrower knows the schedule of repayments. That is to say, the borrower knows both the amount of monthly payments to repay, the repayment term (the number of monthly payments) and the cost of credit (interest + ancillary costs).
It is also possible to give up the borrowed capital and therefore not to buy the desired vehicle after concluding a car loan. The law protects the borrower in this case. There exists for this purpose a period of 14 calendar days during which, after the signature of the loan offer, the borrower may not follow up the loan offer by not buying the vehicle previously desired. This period is called the withdrawal period. To benefit from this, it is sufficient for the borrower to send the lender a registered letter stating that he wishes to withdraw from the loan offer made a few days earlier. Most often, a withdrawal form is attached to the loan agreement. All that is required is for the borrower to complete it and return it to the lender.
The components of the auto loan
The auto loan is made up of the same elements as the consumer credit since it is a particular consumption credit.
The capital corresponds to the amount requested by the borrower when he wants to subscribe to a loan. The capital, as well as the interest and the repayment period, make it possible to know the amount of the monthly payments to be refunded.
Interest is expressed as the lending rate in%. This is the share of the interest payable on the capital that is owed to the lending financial institution. The interest he receives is a part of his remuneration.
More generally, interest is grouped within an annual percentage rate of charge (APR) expressed in%. This APR also contains other ancillary costs, such as handling fees, excluding insurance costs. One should be wary of the APRC because this rate can be fixed, variable or revisable. The APR amount represents what is known as the cost of credit.
Regarding the duration of the car loan, it is usually expressed in months or years. There is no legal maximum repayment period. In practice, repayment terms are generally between 12 months and 84 months (from 1 year to 7 years). The duration makes it possible to calculate the amount of the monthly payments and has an impact on the amount of these and the cost of the credit. The longer the repayment period, the lower the monthly payments. In return, the interest will be higher, which increases the cost of credit. Conversely, the shorter the repayment period, the higher the monthly payments. On the other hand, interest will be lower and the cost of credit will be reduced.
The monthly payments of a car loan correspond to the amount that the borrower will have to repay every month to the financial institution that has granted him credit. These monthly payments are calculated on the basis of the borrowed capital, the repayment term and the value of the APRC, including interest. To these elements can be added the amount of insurance if the borrower decides to subscribe. Thus, a monthly payment is generally broken down into 3 elements: the share relating to the amount of the capital repaid, that corresponding to the part of the interest paid to the lender and that relating to the share of the insurance.
Finally, a car loan can also include insurance. This one is not obligatory. It allows the lender to guarantee the repayment of the car loan by covering the risks related to the death of the borrower, disability, incapacity for work, or loss of employment. It all depends on the insurance the borrower will take out. In case of serious health problems, it is possible to benefit from the AERAS (Insuring and Borrowing with an Enhanced Health Risk) convention. The amount of insurance will be higher but it will be possible to enjoy the benefits of insurance. Insurance is generally offered by the institution offering the credit. The insurer is free to choose the institution of its choice to insure itself. However, the credit granting institution strongly encourages the borrower to purchase insurance from their institution. The cost of insurance plus the APR (credit cost) is the total cost of credit.
Caution: If you decide not to opt for insurance, banks or credit institutions may refuse to lend you the money you request. It then seems wiser to take insurance. You never know what life has in store for you!
What are the conditions to obtain a loan?
In order to be able to subscribe to a car loan, several conditions must be respected. First of all, you have to be of age. Indeed, a minor child under 18 years can not validly conclude a credit and therefore by extension, a car loan.
Then the future borrower should not be registered on the National Register of Personal Credit Reimbursement Incidents (FICP). As soon as a person who has subscribed to a credit no longer reimburses his monthly payments, it will be declared as a payment incident and will be recorded on this file. This file was set up to prevent an indebted person, who can no longer repay his credit, can again subscribe to a credit. Thus, the absence of registration on this file will reassure the financial institution to lend the sum requested.
Before subscribing to a car loan, you must also check its ability to repay future monthly payments. This condition has the same objective as the previous one: to reassure the lender. Indeed, the absence of registration in the FICP does not guarantee the lender financial institution that the future borrower will be able to repay future monthly payments. A person can effectively not be registered with the FICP and not be able to reimburse his future monthly payments if he has asked to borrow a sum of money too high compared to his repayment capacity. To know its repayment capacity, it is enough to make a table, or a list, of all the receipts and expenses during a month. While providing for a certain amount of money to be allocated in the event of unforeseen circumstances, the difference between revenue and expenditure constitutes the repayment capacity. The positive amount of the resulting balance indicates how much can be reimbursed per month. This is the amount that corresponds to the repayment capacity.
In addition to repayment capacity, care must be taken not to exceed a certain threshold of indebtedness. This debt threshold is called the “debt ratio”. It is set at 30% of the income of the future borrower. It corresponds to the ratio between the total financial charges relating to the loans and the monthly income collected.
For example: a single person with an income of 2,000 euros per month will be able to contract one or more credits until the total monthly payments she repays reaches 600 euros per month. 600/2000 x 100 = 30%. Thus, a single person receiving 2,000 euros per month of income and having no other credit in the process of repayment can make a car loan with a monthly payment of up to 600 euros per month maximum.
Be careful: do not forget to check both the repayment capacity and the debt ratio! A loan commits the borrower and must be repaid. It appears essential that the borrower can repay his monthly payments, given his ability to repay and his debt ratio.
Thus, if the repayment capacity is good and with the car loan, the debt ratio does not exceed 30%, there should be no reason for the financial institution refuses to grant you the car loan.
Finally, when you go to see a financial institution for the granting of a credit, it must give you a pre-contractual fact sheet containing all the information concerning the credit envisaged. Thus, with regard to the auto loan, the borrowed capital will be mentioned as well as the duration of the loan and the number of monthly payments, the amount of the interest and the APR. All information in this form is valuable. Since it contains all the characteristics of the credit envisaged, this sheet appears as a very practical tool to compare the various credit offers of different financial institutions. It is therefore essential to play the competition to find the credit that will be the most advantageous for you. Indeed, not all offer the same interest rates and APRs and some impose ceilings lower than the maximum of 75,000 euros.
What is the difference between a car loan for new and used cars?
There are not really any fundamental differences between the new car auto loan and the used car loan. The only differences are mainly the amount borrowed and the repayment term, and therefore the amount of monthly payments.
For two cars of identical model and brand, the new car will cost more to buy than the same car but in second-hand version. As a result, you will have to pay more for a new car than for a used car. As a result, the amount of the loan that will be granted will be higher for a new car than for an opportunity.
In addition, with the same repayment term, car loans are more advantageous. Since a used car costs less to buy than a new car, the amount of monthly payments to be repaid will be lower than for a car loan.
Finally, regardless of the condition of the car (new or used), the amount of APR and interest are generally the same.
The only real difference can be the type of credit you subscribe to. Indeed, although the auto loan is originally an assigned loan, credit institutions now offer more and more a personal loan as a car loan. Differences can then include the APR (cost of credit) and therefore the amount of interest to be repaid. It may be that for a car loan used car, some financial institutions offer an amount of TAEG much higher than they offer for a car loan for new car. This is particularly the case when the auto loan in question is a personal loan and not an assigned loan.
What are the advantages and disadvantages?
The advantages and disadvantages of the auto loan depend on the type of loan that will be granted.
- Assigned loan
Regarding the affected car loan, it is only contracted for the purpose of acquiring a vehicle, a car most often. The borrower is therefore bound by the nature of the property he must buy: a vehicle. He will not be able to buy another type of property. The granting of credit is linked to the purchase of a vehicle and vice versa. We are talking about interdependent contracts. This means that this category of auto loan is accompanied by a significant constraint: the purchase of the vehicle and the granting of credit are closely linked. This link between the granting of the car loan and the purchase of a car has the effect of nullifying one of the two acts if the other does not occur or can not occur. In other words, the non-realization of one automatically cancels the other.
For example, once the auto loan is concluded and the car purchased, if it is not delivered to the borrower, then the auto loan is canceled as a result. It is the same if the sale is not realized. In addition, if the borrower has just bought a car and fails to obtain the auto loan necessary for its financing, then the contract of sale of the car is canceled, considered then null and void.
However, despite this rather significant disadvantage, the affected auto loan has a significant advantage over the personal loan. Indeed, with an assigned loan, repayment of credit begins only when the car has been delivered. The refund can not be made until the borrower has received the car he has purchased. Thus the payment of the first monthly payments may be deferred for a few weeks or even months. This presents a considerable advantage if the delivery of the vehicle occurs late.
Moreover, with this type of auto loan, no definitive payment can be required before the signature of the advance credit offer and before the expiry of the withdrawal period following the conclusion of the credit agreement. This means that if you intend to subscribe to an auto loan assigned to purchase a car, payment of the price of the car can only be made once the loan agreement has been definitively concluded, ie after retraction of 14 days has elapsed. This protection offered to the consumer in article L312-52 of the Consumer Code differs somewhat if the buyer has asked for the immediate delivery of the car. In this case, the retraction period is increased to 3 days. It is then necessary that the buyer waives his auto loan assigned within 3 days after its conclusion so that the contract of sale of the car is also canceled by right.
Finally, it is important to mention, on the order form of the vehicle, that the purchase is conditioned to obtain the credit you are seeking.
To conclude on its advantages and disadvantages, it can be said that this type of auto loan is not very flexible due to the mandatory purchase of a vehicle. However, it offers more security to the borrower. Indeed, there is no need to repay this loan if the car has not been purchased or the borrower has decided to waive the loan.
- Personal loan
Credit institutions and banks also offer another type of auto loan: the personal loan, also called by these institutions the personal auto loan.
Unlike the credit allocated, the personal loan is free to use. It is granted without justification of its use. It can then be used to finance the purchase of a new car, as well as other miscellaneous equipment.
However, this freedom of use is offset by loan conditions that are generally less favorable to the borrower than those of an affected loan. In this case, the interest rates are generally higher than those of the affected loans. The same is true of the APR. Thus, the personal auto loan is often more expensive than a conventional car loan (assigned).
In addition, this type of loan does not offer protection to the borrower unlike the one that would benefit with an auto loan affected. If a problem actually arises during the sale of the car, the car is not delivered, or the contract of sale of the car is canceled, the borrower will still have to repay his monthly payments, and this, from the conclusion of the personal loan. Which is not the case with an auto loan affected.
To conclude on its advantages and disadvantages, it can be said that this type of loan offers flexibility in its use. However, it is not necessarily the most suitable for the purchase of a single vehicle but will be perfect in case of purchase of a vehicle and other types of property. It is still possible to use this kind of loan to buy only a car. It will then be necessary to be careful when buying the vehicle.
New car vs used car
Whenever you have to change your car, the same question keeps coming back: which car to choose? New or used? It is necessary to ask this question since according to the answer, the solution will not be the same since the characteristics of the car loan differ depending on whether it is a new or used car. New and used cars stand out in different ways, not just the cost of the car when it’s bought. Other criteria are counted as the cost of maintenance, comfort or the presence of a multitude of options on the car …
In order to choose between these two types of car, you first need to determine the essential characteristics that will make you buy one car rather than another. To help you, you only need to know the differences between new and used cars.
- New car
The new car can seem the solution: car in excellent working condition, at the forefront of technology … It is possible to customize it from A to Z, that is to say that you can choose the brand, the model, the color, the motorization, as well as any kind of optional options.
A new car also has the advantage of not incurring any immediate maintenance costs. Indeed, new cars are now generally guaranteed for a few years for any mechanical problem that occurs during this period. Thus, you will not have any expenses related to the replacement of a part during this period since the guarantee assumes the cost. According to some manufacturers, this guarantee can even reach up to 7 years, which is not insignificant.
In return for these considerable benefits, buying a new car requires a larger budget than that required for a used car. Thus, the amount of your car loan will be greater, as well as the cost of credit, compared to a car loan for a used car. In addition, it must be taken into account that ensuring a new car is more expensive than securing a used car. This is explained by the fact that in case of an accident with a new car, it will cost more insurance to be replaced than if it is a used car. The higher price of the new car is thus “reflected” on the monthly contribution of the car insurance.
It should also be noted that the biggest discount of the car will be made during the first 3 years (about 30% of the purchase price).
Ultimately, a new car costs more to buy and insure a used car but in return, it has the advantage of reducing the maintenance costs of the vehicle.
Tips for buying a new vehicle:
- Try to negotiate the model you want to buy. For this, play the competition and negotiate with the commercial to get a discount on the original price of the car.
- Even if you can customize the car to your taste, stay sober and avoid buying an unusual car. These elements will allow you to resell your car more easily. It is indeed complicated to sell a car with a color that is out of the ordinary. Similarly, it is better to buy a car from a recognized brand, which you find in all the streets, rather than an unknown brand in your country. People will not take the risk of buying a car of a brand they do not know.
- Enjoy the end of series, it is possible to do good business in this case.
- Ask the dealer how much he will take back your car. It is a common practice that allows you to pay for your new, cheaper car in exchange for taking back your old vehicle.
- Also ask to try the car of your choice. This will allow you to make sure it is the car you want. So you will not regret your purchase and you will not have any surprises while driving it.
- Used car
Buying a used car will save money since such a car costs less than a new car. This even reduces the cost of the car loan. The least cost of a used car, compared to a new car, is its main advantage.
However a used car will require more maintenance than a new car. You will have to check that the vehicle has been regularly maintained by asking the invoices of the various repairs. If you do not, despite the technical control still valid (made less than 6 months before the sale), you may expose yourself to possible near-immediate repairs may be very expensive.
One solution that may seem interesting is that of buying a new but used car. In this case, you should not expose yourself to expensive maintenance costs as the vehicle is still relatively new. If you opt for this solution, try to buy a vehicle that is more than 3 or 5 years old. In addition, by combining it with the classic (assigned) auto loan, you will reduce the cost of your car loan when it would be otherwise with a personal auto loan.
Tips for Buying a Used Vehicle:
- Find out about the side of the vehicle. A price that is too attractive can hide potential defects or lack of maintenance. It would be a shame for you to buy a car much cheaper but having to make all the repairs.
- Some dealers offer used cars. In this case, go to a dealership of a different brand than the car you want. This will make you realize small savings. Indeed, a used car of an X mark will generally be cheaper at a Z dealership than at an X brand dealership.
- If you do not pay attention to the aesthetics of your vehicle, you can opt for a car of an unusual color. Since this type of car is more complicated to sell, the price will be slightly lower than for a car of a classic color (black, white, gray …) Having a license allows you to gain autonomy by not depending on others when we need to move. But when you have just received your license, you are considered a young license for 2 years if you have done the driving accompanied, or 3 years otherwise.
Acquisition of a car for young people
The status of “young license” has consequences that must be taken into account when buying a car. Indeed, due to the lack of experience in driving, car insurance offers higher rates for young drivers. Similarly, if you buy a big car if you are young, the insurance may refuse to insure your car, or will accept in exchange for an additional cost on your insurance contribution.
To counterbalance this higher car insurance rate, it is then necessary for the young driver to buy a used city car. Since this type of car is designed to run primarily in the city, this is a small to medium size car model suitable for a young license. In addition, for a young person who has just passed his license and who does not have a significant financial contribution, or no contribution, this type of vehicle is ideal. It will not pay too much auto loan payments.
Therefore you will benefit from a vehicle that will not have cost you too much, compared to a big car, while paying monthly payments rather suitable to your financial situation. So your car loan will not cost an ‘arm’.
Buy the car of your dreams
Have the latest model released? Or a car equipped with a radar and a reversing camera? or an electric car? Determining the model of the car of your dreams is rather an easy thing to do despite the multitude of criteria to take into account. The more parameters to take into account, the more the amount of the ideal car will be important. Unless you are a bargaining chip, it will be very hard, if not impossible, to lower the price of the vehicle at a reasonable price. Therefore, the amount of auto loan will be larger, and the cost of auto loan too.
However, it is more complicated to ask which type of car is best suited to its needs. One must then ask what is most important to eliminate superfluous criteria and focus only on what really matters.
For example, for a family with several children, the most suitable vehicle will be a minivan. This type of vehicle has the advantage of being spacious, to have a larger number of seats (7 in general) and has a large chest.
Another example, if you have good weather all year round and you are single or a couple without children, then a convertible may seem to you the car best suited to your desires. You can enjoy the sun while driving.
Choosing the vehicle that suits you best is essential. Indeed, it would be a pity to take out a car loan to finance the purchase of a vehicle that you will only use occasionally as it would not be adapted to your needs.
Therefore, the car of your dreams may be completely unsuited to your real needs. It would be a shame to waste your money repaying a car loan that will seem like a burden.