Many customers need a loan to finance their new car. For some time now, not only a car loan has been offered for this purpose, which is designed as an installment loan with the same monthly charges, but also a new car loan with a final installment. With regard to repayment, this form of loan has special features that can be advantageous or disadvantageous depending on the financial situation of the borrower.
Contractual determination of a final installment loan for car financing
As with an ordinary installment loan, the creditworthiness of the borrower is checked before a final installment loan is granted. Securing of the loan is also regulated in unison: the lending bank is left with the vehicle registration document as security until the loan is repaid in full. The repayment procedures for a new car loan with a final installment are fundamentally different.
While the same amount is paid monthly for an installment loan and the loan is repaid over the entire term with repayments, this is not the case with a final installment loan. Only a negligible part, if any, of the loan amount is repaid during the term of the loan. Only the current interest payments are to be made. At the end of the term, a huge final installment is due, with which almost the entire loan amount is repaid at once.
Advantages of a final installment loan as car finance
Anyone who decides to buy a new car with a final installment only has to pay very low installments. This means that even consumers who are temporarily short of cash can afford relatively high-quality new vehicles. Many car sellers also consciously offer this type of financing through their own banks in order to increase their customers’ willingness to buy expensive cars.
If it is actually foreseeable that the borrower will have a higher income in a few years, such a final installment loan for vehicle financing can make sense. For example, this is regularly the case for young professionals who can expect significant salary increases in the next few years and who also need a new, reliable car for professional reasons.
Disadvantages of a final installment loan as car financing
A new car loan with a final installment can, however, also lead to car buyers taking over and buying a vehicle that they cannot actually afford. The low rates during the term can be dealt with without any problems and with regard to the very high final rate, one hopes to be able to find the money needed somehow.
If this doesn’t work, you either have to find follow-up financing and mortgage the car, which is already quite old, or sell it entirely. In addition, such loans are relatively expensive in any case, because the entire loan agreement is subject to interest over the entire term.