There are diverse ways to finance the purchase of a car

By: S_N_Chatterjee

Obviously the best solution is to buy a car and pay in cash. But fortunately you can always also take a loan. Is it still a good idea to take a loan to buy a car?

Toyota is the market leader in Poland in terms of the number of new passenger cars bought in Poland in 2021. Individual customers most often choose Toyota Yaris, which costs from PLN 62,900 to PLN 77,900 with basic equipment, depending on the body type and engine version. Dacia Duster (with prices from PLN 48,900) and Toyota Corolla (from PLN 80,000 to PLN 113,000 with basic equipment) also enjoy huge popularity. In accordance with the data of OTOMOTO, when it comes to used cars, those worth from PLN 30,000 to PLN 50,000 and above PLN 50,000 are most popular, with figures reaching 27.3% and 41.4%, respectively. OTOMOTO customers have been looking at Audi A4 and BMW 3 Series as well as Opel Astra and Ford Focus. When considering options to finance car purchase, you can almost always take a loan, no matter if you choose to buy a brand new car or a used one.

A loan to buy a car - how does it work?

A car loan is the form of special purpose funding which can be allocated to the purchase of a car. It is possible to obtain cash to pay for a brand new car or a used one, purchased from a private individual or a dealer of used cars. However, all terms of financing should be checked because banks are not eager to offer loans on older cars. Sometimes offers of loans to purchase used cars are less attractive. In such a situation, you can take an "ordinary" cash loan which can be spent arbitrarily, without a need to purchase a car insurance policy.

An application for a car loan can be filed online or at the bank. Assistance in obtaining such financing can also be obtained from the car dealer who may present a comprehensive sale proposal with financing options. The maximum term of car loans ranges from 8 to 12 years, depending on the offer. 

What is the cost of a car loan?

Standard costs:

• fee for the granting of a loan - 6 - 8% on the amount of loan granted,
• interest - approx. 7% per annum.

Additional costs associated with the car loan include:

• service charge,
• accident and theft insurance which may be required by the bank, even if a used car is bought,
• fee for untimely filing of the vehicle documentation with the bank, e.g. copy of a registration card, vehicle history card, etc.
• additional insurance to secure loan repayment,
• fee for early mortgage pay-off.

The amounts and types of individual additional fees depend on bank's offers.

What conditions should be met in order to obtain vehicle funding?

A car loan can be obtained by a person with the suitable credit worthiness. The amount and kind of income are important but at present lenders accept various sources of income, including income earned abroad. The credit history and absence of arrears in the repayment of prior liabilities are also taken into account. Lenders frequently also impose specific requirements with respect to the age of the borrower.

The bank may also require:

• accident and theft insurance, and assignment of rights and obligations under the insurance policy in favour of the bank,
• establishment of an additional collateral, e.g. transfer of title to secure loan repayment, registered pledge or deposit, which restrict the possibility of disposing of the purchased car,
• additional insurance to secure loan repayment.

It should also be remembered that while the find the best loan deals should not be a problem, this method of financing may not be always possible in case of a used car. There are two limitations in this regard: a car usually cannot be older than 12 years at the time of purchase or older than 16 at the time of loan repayment.

Car loan and cash loan - which option to choose?

Fewer formal requirements and collaterals required by the bank in comparison to a car loan are essential advantages of a cash loan. The obtained cash may be spent for any purpose and the bank will not check how the borrowed funds have been used by the borrower. Higher loan costs may be a disadvantage. Thanks to additional collaterals, a car loan is not only cheaper but can offer higher loan amounts. Borrowers may obtain cash exceeding the value of their car. With a comprehensive offering, it will also be possible to save on additional costs. An insurance policy procured with an insurance company that cooperates with the bank will usually cost less than the policy in individual offer.

Summary

When it comes to the advantages of car loans, one should mention that credit decision is granted quickly and there is an option to finance 100% of car value. Additional burdens related to the procurement of accident and theft insurance or insurance to secure loan repayment required by the bank can be considered to be disadvantages. If you decide to buy an older car, the costs are increased. Before choosing the best financing, it is a good idea to compare several offers and calculate the costs associated with each solution.

By S N Chatterjee

Copyright 2021 © S N Chatterjee - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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