What you need to know before taking a car loan

What is a car loan

This is a targeted loan, the money from which can only be spent on the purchase of a vehicle. You can buy both a new car and a used one. But credit for buying a car from a private seller is not very willing and far from everywhere, so here it is better to choose a car dealership that sells used vehicles.

Car loans are distinguished by several characteristic features.

Pledge

Until the loan is repaid, the car will remain pledged to the bank. Until then, the vehicle passport (PTS) is most often kept in a credit institution.

Expensive insurance

According to the law, the pledged property must be insured against the risks of loss and damage. In most cases, banks are not content with an OSAGO policy - they will have to issue a CASCO.

On average, this increases the loan amount by 10%. On the other hand, if the car was not insured and was stolen, the borrower will still repay the loan in full.

Dmitry Molkov Director of the Financial Services Department of the AutoSpecCentre Group of Companies

Moderate interest rate

Based on statistics, there is no need to talk about the global difference as a whole. In the first quarter of 2019, the average rate on a car loan was 17.1%, and on cash loans - 17.62%. According to the Central Bank, the weighted average rate on loans for a period of more than three years in February 2019 is 12.76%, and taking into account car loans it is already 14.13%.

But the difference will be visible when you start looking at specific bank proposals that are suitable for your situation. In most cases, the rate on a car loan will be lower than on an inappropriate consumer loan, since the bank insures its risks with a pledge and can afford to offer more favorable conditions.

Who issues a car loan

Even if you apply for a loan directly at a car dealership, at the opposite end, the bank with which you sign an agreement is still waiting for you.

A credit institution can place its representative directly in a car dealership or act through a broker - an intermediary who acts as a connecting link. Brokers often send applications to several banks at once and connect you with the one that is ready to issue a loan. But this does not mean that they select the most favorable conditions for the client. But you will most likely have to pay for help.

What are car loans

There are several types of car loans. When choosing, you will have to focus not only on the desired characteristics, but also on the conditions that are ready to offer you.

1. Classic

Registration takes place according to the standard scheme. You are making a request to the bank. The institution checks your solvency, credit history and decides whether to give you a loan or not. The percentages here will be slightly lower as your conscientiousness as a customer will be confirmed.

2. Express loan

For registration, 2-3 documents are enough, the decision on approval is made quickly. The risks in this case are offset by slightly higher percentages.

3. Factoring

This is an interest-free loan with an impressive down payment. If you pay 50% of the cost of the car or more, the rest of the amount can be paid in installments.

4. Credit with a buyback (BuyBack)

Monthly payments are calculated in such a way that by the last payment you will owe the bank another part of the amount - usually 20–40%. To pay off the loan, you can deposit the remaining amount yourself or sell the car to a dealer who will deposit the remainder. The scheme is more often used for status expensive cars.

What are the advantages of a car loan

To consider the pros and cons of a car loan, it must be compared with something. If with a purchase without a loan, then the leader in this race is obvious: the absence of credit is always better than its availability (but there is a nuance, which is discussed below). Therefore, let us compare it with a regular consumer loan and outline the important advantages.

1. Special price

Often car dealerships offer special prices for those who take a car loan.

The customer of the bank becomes the buyer of the car, and the dealers often give very good discounts to the banks. The discount can be up to 10%.

Suren Hayrapetyan Managing Partner, Rebridge Capital

In pursuit of profit, do not forget about additional costs, because of which the actual costs can increase. In addition, promotions usually apply to cars of a certain configuration or involve the purchase of options, which in the end may force you to spend more than you bargained for.

But there is the same nuance here. If you buy an expensive car, you can always buy it on credit at a discount and pay off the loan in full, a month later, without overpaying interest. This will only work if the difference in price exceeds the cost of CASCO and other related costs.

2. The possibility of receiving assistance from the state

The concessional car loan program has been extended. You can receive from the state 10% of the price of the car to the initial payment, and if you live in the Far Eastern District - 25%. To qualify for the program, you must meet one of two criteria:

this is your first car;
you have two or more children;

There are also requirements for the car you intend to buy. The car must be:

new;
Russian assembly;
weighing up to 3.5 tons;
worth up to 1 million rubles.

To get state support, you need to apply directly for a car loan to the bank, but only to the one that has joined the program.

3. Approval of a larger amount

Inappropriate consumer loans are not backed by anything. The collateral for car loans reduces the risk of non-return of money for the bank: in which case it will simply take and sell the car. Therefore, the institution can issue significantly larger amounts than it would approve for a loan without collateral.

4. Longer payout period

On average, a car loan is issued for a period of three to five years. Banks most often want to receive money issued under a targeted consumer loan earlier.

5. Interest rate is lower

If you contact a bank with a request to calculate a consumer loan and a car loan for you, the conditions for the second will most likely be more profitable - the reason is in the pledge. But exceptions are possible here, and more often than it seems.

The bank may persistently offer you a credit card with a certain limit and not approve a car loan for a smaller amount. Just put up with it, because it is impossible to understand this - lending institutions do not disclose the criteria for evaluating clients so that scammers do not use this information.

What are the disadvantages of a car loan

Let's compare everything with the same inappropriate consumer credit.

1. Pledged property

Until you pay off the loan and receive the TCP, you will not be able to sell the car.

2. Expensive insurance

As we have already found out, you cannot do without CASCO. But sometimes banks impose additional insurance services. Of course, you can refuse, but then you simply will not be given a loan.

In order for the loan to be approved, it is possible to issue "imposed" insurance services, and after receiving the money, within two weeks, write a statement about the refusal of insurance to the insurance company. The money must be returned within ten days.

Orest Matsala Leading Lawyer of the European Legal Service

3. There is a down payment

This is not always a prerequisite when applying for a car loan, but many banks require you to pay some part of the cost of the car. You do not need to do this when you receive an inappropriate consumer loan.

4. There are requirements for the car

Since the bank takes the car as a pledge, it sets the criteria that the car must meet - in order to sell it later if you do not return the money. You can buy anything with funds from a consumer loan.

What to look for when taking a car loan

Consider offers from several banks

The eloquent seller strongly recommends taking out a loan from a particular bank, and this should alert you: with a high degree of probability, it is beneficial to him, and not to you. Consider more options to choose the best one. And also specify the conditions of a consumer non-targeted loan.

Find out all the conditions of the promotion

The information that you saw on the banner is, of course, the truth, but not all. For the purchase to be really profitable, you must read all the conditions. Otherwise, you may mistakenly spend much more than you planned, and still pay interest on an inflated amount.

Check for hidden co-payments and insurances

Read the contract carefully and make sure you understand every line of it. This will save you from additional expenses and from problems with the bank if you violate the terms of the contract, which you simply did not look up to.

Evaluate expenses and incomes sensibly

With a car loan, you need to budget not only the monthly payment, but also related expenses - insurance renewal, transport tax, fuel, and so on. As a result, costs can increase significantly and become a heavy burden.

What is the bottom line

A car loan is a good financial instrument if you use it correctly.
If you take a car loan (and any loan in general), read the agreement carefully and specify all the conditions.
If you find a consumer loan, the total cost of which will be lower than the total cost of a car loan, and the bank will approve the amount you need, choose it. Save on hull insurance and be able to dispose of the car as you please.