Financing your car cheaply: How do I finance my car?

What is the cheapest way to finance my car? If you ask consumer advice, you can expect the following answer: The cheapest car financing is not the one with an installment loan, a final installment financing or a leasing contract. See for a summary

If you want to finance your car really cheaply, you should do so with your own funds. And if they are not available, you just have to save and wait. Sure, if you pay for your dream car out of your own pocket, it will impress the car dealer in any case. There are also likely to be huge discounts.

Only in a few cases will it be impossible to pay cash out of your own pocket. And if you are dependent on a new vehicle, you probably cannot wait until the purchase price is available through savings.

In addition, consumer advisors are not always right. There are situations in which the use of equity capital to buy a car is not so sensible.

Pay car out of pocket?

Pay car out of pocket?

Under what conditions is it advisable to finance a vehicle with your own funds? It always makes sense to use your own money if it brings little return and is readily available.

Is the amount in the checking account, in an immediate opening savings account or is it in overnight money? Then you should not hesitate to use this money instead of car debt financing.

The rule is: If the money brings in less interest than the effective interest rates for car financing with external funds, you should use it to buy a car. In the examples above, this is practically always the case, even if savings interest should recover.

The situation is similar when a savings product has just expired and the money is immediately available in the checking account.

Here you have the choice

Here you have the choice

You can reinvest the money with high returns so that the income from it is higher than the loan interest. For example, you can buy ETFs on stocks. Or you can do without reinvestment and pay your dream car in cash instead and benefit from cash discount.

We think the latter is more recommendable. Capital can be built up again with the saved credit rate. If there are own funds, but the money is fixed or brings a good return, things look different.

Fixed-term deposits, for example, cannot be easily canceled before the agreed term ends. If anything, this is only for a fee. Using the money to buy a car can, therefore, prove to be a minus business.

The same applies to other investments. If you invested your capital in shares, for example, whether single shares, ETFs or funds, a sale at the wrong time, with rising prices, would not be good business.

Have you signed long-term contracts such as endowment life insurance or private pension insurance? Or a building society contract? Even with low-interest rates, the exit from such financial products is usually not worthwhile.

Low surrender values ​​and the elimination of profit sharing can lead to economic disadvantages compared to debt financing.

If you decide to (partly) finance the car with your own funds, you should always keep a nest egg in reserve, if possible, so do not spend every penny on vehicle procurement. Unforeseen expenses – a broken refrigerator has to be replaced – always put a strain on the household budget when it is least useful.

Financing without a deposit?

Financing without a deposit?

Whether new cars, annual cars or used vehicles, “full-auto financing” will be possible in most cases without any problems. The only question is whether it is better to avoid vehicle financing without a down payment.

A down payment can be helpful, especially when purchasing a new car. It can reduce the APR and thus the total cost of the loan.

The cheapest interest rates are possible for earmarked car loans. Such loans are regularly only issued against the vehicle being assigned as security. The interest is so cheap because, in addition to the silent assignment of wages, the vehicle registration document is also handed over.

The problem is, a new vehicle loses considerable value in the first year of use. With a mileage of 15,000 km, this is somewhere between 20% or 25% of the purchase price.

If a bank has fully financed the purchase price, a quarter of the security is lost at the end of the first year of use. But full financing, which runs for seven years, for example, has not yet been repaid by a quarter in the first year.

The bank’s remaining claim is therefore no longer fully covered by the collateral vehicle. This increases the credit default risk. The result may be higher interest rates.

The down payment can be represented, for example, by the sales proceeds of the old car. A cash reserve of 2 to 5 monthly salaries is generally recommended. If you have followed this recommendation, you can use part of the cash reserve for the deposit. Always keep a nest egg.

Do not try to use a revolving credit card for the down payment or to use the overdraft facility. Experience shows that the debit balances can often not be returned as quickly if larger purchases are partially financed with them.

A down payment with the overdraft facility can, therefore, be more expensive than the somewhat higher interest rate for vehicle financing without a down payment.

Installment loan: cheapest car financing for private individuals

Installment loan: cheapest car financing for private individuals

If you want to use the vehicle privately, the installment loan is still the easiest and cheapest car financing.

Installment loans are completely transparent. The amount of the monthly installments and the total burden of the loan are fixed from the start.

If the vehicle has been assigned as security, ownership is transferred to it when the last installment is paid. In other cases, they immediately become owners of the car.

Installment loans are the cheapest financing solution because the repayment begins immediately and the repayment is completed at the end of the term.

If the rates remain the same, the repayment portion increases over time and the interest portion decreases. Because no interest has to be paid on the repaid part of the loan.

In our opinion, installment loans are always preferable to other forms of financing if they want to drive the car not just for a short time, but for example for 5 to 7 years.