Get Loans to finance cars?
Installment financing is the only way in which most citizens can afford to purchase a vehicle. In fact, currently, more than 80% of cars are purchased using the installment financing formula. The low current interest rates and the important business volumes that financial institutions get thanks to the granting of loans explain that it is a booming business.
In recent years, banking and financial institutions have expanded and introduced multiple innovations in their products. The loans to finance a vehicle are currently very flexible: they can be contracted in terms of up to 10 years and include additional services such as the possibility of changing cars without having to pay it completely. However, the interest rates they apply are high: they can reach 12% APR.
Consumer credit in Spain has doubled in eight years
And this spectacular growth has been mainly due to car financing. At the end of 2004, the volume of loans granted in this sector amounted to 48,996 million dollars, which represents 79% of the total consumer credit in Spain (which represented 68,274 million dollars in 2004). Enrico Sanna, manager of the consulting firm Mercer Oliver Wyman, estimates that low-interest rates, greater family wealth and consumerist euphoria are some of the factors that explain the boom that is registering this type of financing.
“Currently, increasingly representative cars are being bought, partly because interest rates have been low for several years,” he says. In 2005 alone, SUV sales grew 23%. Luis Querol, commercial director of the car segment of Banco Cetelem, also estimates that they are currently living the best moment in vehicle financing, thanks to the positive situation of the family economy.
“In addition, there is a lot of very competitive credit offerings that can favor the renewal of a good number of old vehicles. Today, more than 40% of Spanish vehicles are older than 10 years. It is more than feasible that many drivers are currently considering changing their vehicle, ”says Querol.
Antonio Harpold, president of the Federation of Associations of Automotive Dealers (Faconauto), also states that there is greater diversification of the offer, which is encouraging the growth of competition. “The conditions for obtaining loans are good.
Low-interest rates and consumer confidence in the economic boom situation boost the request for loans to finance vehicles,” he adds. Harold says that in 2005, Spanish motorists paid an average of 20,495 dollars for the purchase of their vehicle, 5.2% more than in 2004.
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Flexibility is one of the golden rules in which financial companies now strive when designing their new products. In the credit divisions created by the automotive firms themselves, the star loans are today, those that allow the vehicle to be exchanged for a new one from the firm itself every three, four or five years. These types of loans allow financing only a part of the car, not everything since the vehicle will never become entirely the buyer. “That is, a car of 30,000 dollars can be financed by 15,000, for example, which is the estimated value that it will have in three years, when the buyer exchanges it for another, as can be committed in the financial contract,” says Enrico Sanna, from the consulting firm Mercer Oliver Wyman.
These star products are the so-called selective credits, which offer the possibility of changing cars from time to time, without paying their total price. This, in part, serves to cushion the loss of value that cars suffer since they leave the dealership. It also responds to the current fashion of using a car for a very limited time and changing it soon for a newer one. “Our client is showing that he likes to change cars every three years,” says Juan Antonio González, a marketing analyst at Toyota.
While financial companies strive to create personalized and flexible loans, banks and savings banks that also opt for this business try to influence aspects such as prices or repayment terms. One of its star benefits is to offer the possibility of financing the car as part of the mortgage, that is, at a much lower mortgage interest rate than those that present personal loans, which can exceed up to 12%.
Among the latest developments, offered by Good Finance, for example, is to finance a car with a repayment period of up to 10 years. “These credits allow you to pay comfortable fees,” says Jesús Tejada, director of the entity. In his opinion, there is a general tendency to increase the term of financing, due, above all, to customers seeking to improve their personal image with vehicles and luxury brands that were not previously considered.
In any case, it is an off-road vehicle or mid-range tourism, before hiring a loan to finance a vehicle, you should look at its main elements. In general, loans to finance cars have interest rates above 7%, opening fees of around 1%, average repayment terms of around 60 months and allow financing of an average of 60,000 dollars.
Passionate about the idea of having a new, more powerful and safe vehicle, sometimes customers forget to look at the financing conditions that entities will impose on them. But given the high family indebtedness of households, it is important not to lose sight of the interest rates and monthly installments that they will have to face.
Monthly fees depending on the range of the vehicle
A common model of the Renault Megane, the best-selling mid-range car in Spain in 2005, with a dealer price of 20,000 dollars can be financed in 24 months with a monthly installment of 897 dollars, at an interest rate of 12% APR or 60 months, paying 398 dollars per month, which represents an interest of 8.5% APR.
Another model also very sold, directed especially for young people, is the Fiat Punto, which is in the market at a price of around 12,000 dollars. The monthly installments to finance this car for 36 months would be around 371 dollars.
In high-end, of course, the monthly fees to be paid are much higher. For example, the Toyota Landcruiser, the best-selling SUV in Spain in 2005 and that can be found in the market from 43,335 dollars, can be financed at 12 months, paying dues of 3,748.64 dollars per month, which means assuming an interest of the 12.05% In the maximum period of 84 months to which it is possible to finance its Toyota Financial Services vehicles (Toyota’s financial entity), that same SUV could be financed with monthly installments of 652.98 dollars, according to approximate calculations of the entity. This means dealing with an interest of 8%.