The car loan falls into the category of consumer credit. As such, a credit agency or a bank lends money to the borrower to finance his purchase of a car (new or used). In order to finance this purchase, the borrower can choose the personal loan or the auto assigned loan.
The borrower may be forced to use a specific type of credit
Indeed, if he wants to buy a used car, he will have to move towards the personal auto loan. He may apply to a bank or credit institution. As part of a purchase of a new vehicle, he can choose the auto credit affected. This credit has the advantage of being directly suspended upon delivery of the car purchased. The repayment of the monthly payments will begin after the delivery. Conversely, if the buyer does not take delivery of the car, or if it is not suitable, the funds will not be issued.
Credit institutions, banks or organizations on the Internet, are free to set the interest rate they want, the goal being to remain competitive while getting paid.
Of course, the calculation of a loan (whether consumer or real estate) depends on several criteria. The higher the amount borrowed and the longer the loan period, the higher the cost of credit. The cost of a loan is reflected in the interest rate applied. The interest rate and the remuneration that the lender will withdraw from the situation. Credit institutions are paid at this rate. The interest of each credit is their income. This rate is calculated according to the duration of the loan, the nature of the risks incurred (purchase of a new vehicle, used car, loan work, etc.) and guarantees provided by the borrower (situation personal and professional). This rate will correspond to the interest to be paid by the borrower in addition to his various monthly repayments.
Thus, the longer the duration, the higher the rate applied. This is explained by the fact that the risk incurred by the banking establishment is much greater when the duration of the loan is long. Indeed, the borrower may be subject to certain hazards of life that will compel him to be unable to repay all or part of his monthly payments. An additional dependent child, divorce, loss of employment, death (etc.) may result in a reduction in the borrower’s disposable income. The household’s disposable income is no longer sufficient to enable the borrower to honor his commitments and repay his monthly payments. Logically, these events are much more likely to occur if the time between the lender and the borrower is long. It is therefore understandable that these lenders increase the interest rate (their remuneration) according to the duration of borrowing to guard against its risks.
Depending on the nature of the risks
The borrowing rate may vary. Indeed, some financing needs are riskier than others. The personal loan is riskier than the loan assigned. The latter is granted for a purchase, usually a consumer good such as a new vehicle, very precise. The bank (or the institution delivering the good) therefore has a very precise knowledge of the nature of the risk. It does not commit to a fuzzy or unknown risk. For example, when the borrower applies for a loan to finance work, the interest rate will be very high. In fact, this is a fairly vague risk that can lead to complex situations when there are delays or unforeseen events, when delays become longer and so on. The borrower may find himself in a situation where he will have to repay his monthly payments while his work will not be finished and he will still need cash. This situation is not favorable for credit institutions. To cover themselves and keep a salary, they apply rates almost twice as high as those applied in the context of a personal auto loan.
A personal loan for the purchase of a new vehicle
In the same logic, a personal loan for the purchase of a new vehicle will cost less than a loan for the purchase of a used vehicle. The risk is less on a new vehicle than on a used vehicle. The buyer of second-hand goods is much more likely to incur costs as a result of their purchase than a buyer of new goods. In the case of the purchase of a used car, it may be repairs not planned in the months following its purchase. In these situations, it is very rare for the purchaser to be able to call on any guarantee that will allow him to pay his expenses. While a new vehicle is often guaranteed by the manufacturer for several years, which reduces the financial risk to which the borrower and therefore the lender is exposed. The cost of a car loan for the purchase of a new vehicle is therefore lower than the cost of a car loan for the purpose of buying a used vehicle.
When an individual chooses to use a loan to finance a purchase (from a vehicle or other), the cost of the credit should not be the only element to calculate before making the decision to apply. In addition to the calculation of the loan, the borrower must be interested in his debt ratio. This is the ratio of the different debts to the borrower and the monthly net income of the borrower. In general, this ratio must be less than 33%. For example, a household must not use more than 33% of its net disposable income to settle its debts. Beyond this rate, the household is considered to be over-indebted.
This ratio is however to put into perspective. It is important to take into account nominal values of net disposable income as well as debt. The 33% will weigh less on the finances of a wealthy household with comfortable incomes than on a household with low incomes. Loan applications are sometimes accepted automatically without a personalized study of the file. If the debt ratio is less than 33%, the file can be accepted even if the “remainder to live” is low and would not allow the household to face all the financial situations it should face. This rate is preferably also calculated by the borrower himself. Before any loan application, the borrower should know what is his debt ratio in order to anticipate and himself to know if his situation allows him to finance himself through this. Different websites offer individuals to calculate this rate by filling in different predefined items.
For households with low incomes
It is better to turn to banks for personalized support. It may be harder to get the loan, but the risk of over-indebtedness is a very significant risk facing many households. In parallel with the development of credit institutions on the Internet, the number of over-indebted households continues to grow. Since 1990, the number of over-indebtedness files filed has risen by 140%.
The amount of indebtedness of these households today averages € 41,254, with a total of 9 accumulated debts (including real estate loans). It would therefore be advisable to strengthen the underwriting rules and limit the obtaining of consumer credit to households that could not face these financial risks. For example, a low-income household could be denied a loan even though the 33% rate would not be reached.
When the borrower decides to finance himself through consumer credit, let alone auto loan, it is important to calculate the cost of credit and its debt ratio. He will be able to make several simulations to find the most advantageous credit and corresponding most to his needs. However, he will not be able to make several calculations to determine his debt ratio.
Depending on this last element, he will be able to apply for adapted credit. It may need to revise its ambitions downward and ask to borrow a smaller amount. It will also cost him less to take out a loan on a smaller period. However, it will have to allow its situation to the extent that the monthly payments will be more important.
In order to avoid all financial circumstances preventing him from repaying all or part of his credit, it is recommended that the borrower take out loan insurance. Unlike real estate loans, insurance is not mandatory when applying for a consumer loan.
While this optional insurance has a cost and affects the calculation of the credit, it allows the borrower to insure against risks such as loss of employment, disability or even death. It is important to know that despite the occurrence of these situations, the monthly payments are always due by the borrower or his successors.
If this insurance is taken out, it replaces the borrower in order to regularize the missing monthly payments. This insurance is offered automatically by credit institutions when applying for consumer loans such as car loans.