With today’s high prices for new cars and young used vehicles, most customers cannot pay for a car without financing. In addition to a classic installment loan, a car loan with a final installment is also possible. However, this form of financing has specific advantages and disadvantages, which you should inform yourself about before deciding on such a loan for car financing.
The peculiarities of a final installment loan for car financing
As with an installment loan, the payment of a final installment loan is only approved by the bank if the customer can demonstrate sufficient creditworthiness. The creditworthiness is carried out with the help of self-information about the financial situation and with an inquiry to Credit Bureau.
If it follows that the borrower will most likely reliably repay the loan, the final installment loan is approved and the loan amount is then transferred to the customer’s account.
Just like with other forms of car financing, the loan amount is paid out for a specific purpose, so that the loan amount can only be used to make the intended vehicle purchase. The vehicle registration document is usually deposited as security for the bank’s repayment claims.
The difference between an installment loan for vehicle financing and a car loan with a final installment lies in the repayment plan. An installment loan is a typical annuity loan in which the monthly installments are always the same amount throughout the term. The interest portion of the installment falls, so that an ever higher repayment amount arises. In the case of a final installment loan, there are hardly any repayments during the entire term, essentially only interest is paid. Repayment takes place at the end of the term in a very large final installment, which is why a final installment loan is often referred to as a “balloon loan”.
Advantages and disadvantages of a final loan for car financing
A car loan with a final installment enables customers with a tight budget to buy a relatively expensive vehicle. Because the burdens from the monthly installments are extremely low during the term. However, at the end of the loan term, the very large repayment amount must be paid in one go. If this is not possible, you have to try to extend the loan or sell the vehicle. The residual value will generally not be sufficient to be able to make the repayment in full.
This puts customers in the situation that they no longer have a vehicle, but still have to pay off the remaining debts. In addition, a car loan with a final installment incurs higher interest overall than an installment loan. Since there are hardly any repayments, a very high loan amount is paid on the entire loan term.