Car loans are a widely popular means of financing the purchase of vehicles as they are available both for individuals and companies, and can help you buy either a new or second-hand car. You could almost say it is an ideal option for everyone… Almost. This is because loans, regardless of their type, are far easier to take out than pay off. Before you decide to take one, make sure you are well prepared for it.
How much is a loan, or ambition vs. reality
If you wanted to purchase a new car for 60,000 PLN using a loan for 48,000 PLN taken out for 5 years, then, depending on the bank chosen, you would need to pay back from over 55,500 PLN (at nominal interest rate of 5,49% and with 0% bank’s premium) to as much as 64,000 PLN (at nominal interest rate of 4,99% and with 5% bank’s premium). In both the cases the costs range from 7.5 to 16,000 PLN. This really is a lot! You could use the same money to buy a second-hand car for your adult child or to have fantastc holidays abroad.
This is why, when considering purchase of a new car, it is most important to analyze your needs and opt for a car that will fulfill these needs rather than satisfying your ambition. When changing a car, people tend to be very specific about such features as brand prestige, engine power, internal space and luggage capacity, while in fact the only function of the new car is to drive them to work and back. If you come to the conclusion that the state of your finances does not allow you to make the purchase, you may start browsing through car loan offers. One thing you need to remember is that the less the bank needs to lend you (i.e. the cheaper the car and the more you pay upfront), the smaller the overall cost will be.
Car loan: why loyalty to “your” bank pays
When you have found the car you want to buy, the first bank to visit is the one you already have an account in. Why so? Because they receive your pay every month. It is them who will know your credit standing best and whose consultants will have fastest access to your income and spendings. They will give you a solid analysis of what loan conditions you can expect.
What information does the bank need?
Before you contact the bank, prepare the following:
- your (and other family members’) average monthly income, net,
- how many people your family includes (and how old they are),
- list of other financial liabilities,
- form of employment,
- make, model, manufacturing year, price and information on the seller of the car you have chosen,
- how much you will pay upfront.
In order to apply for a loan, you will be asked to provide your ID, employment and earnings certificate, your previous tax declaration and your spouse’s agreement. Some of these may not be required, depending on the bank.
Why comparing loans is always a good idea
When your bank has given you conditions, use the Internet to check other offers. There is a number of websites that professionally compare loan conditions and produce ranks on the basis of data obtained from different banks. This is how you will narrow down your search. If you are sure you need the exact make and model chosen, try loan offers from brand-associated banks, such as Volkswagen Bank or Toyota Bank. Remember the example above? If you compare and select wisely, you can save at least a couple thousand PLN!
Not only interest and commission
You could write thousands of pages on the tricks banks and other financial institutions resort to in order to sell a loan. True, they can offer zero commission but they will surely compensate for it by increasing the interest rate – how would they make a living otherwise? The same applies to low interest rate; be sure to check what the commission is, then.
Not only this; you will be made to pay for other services, too, such as comprehensive coverage, which is obligatory. This is how the bank secures itself in case your car (which is the main collateral) is stolen. In fact, you may find out that while the interest and commission are lower than anywhere else, the cost of compulsory insurance is far greater than at the competition. Certain institutions also add the remaining insurance options: third-party liability and accident insurance. This may, actually, be an asset: once you have purchased insurance, you won’t have to worry about it anymore. Many financial institutions demand that you insure yourself against loss of work, or purchase life insurance; remember to include these costs in your calculations as well.
Before you make your final decision, check which products you will be required to purchase in order to take out the loan; these are usually credit or debit cards. Remember: if it takes 5 years to pay off a loan, and each month you pay 10 PLN for the account, 3 PLN for the debit card and 5 PLN for the credit card, the total paid over those 60 months for additional financial products amounts to 1080 PLN!
All things considered, while analyzing different loan offers, make sure you check the following:
- interest rate
- obligatory insurance, etc.,
- other obligatory financial products.
Other factors to consider are the conditions of prepayment and the consequences of delaying one or two loan payments, as well as “repayment holidays” option.
Car loan collaterals
In the case of a car loan, the main collateral is the car itself. This is why you need to assign your comprehensive insurance to the bank so that shold the car be stolen, it is the bank that will receive compensation instead of you. Financial institutions also require partial or conditional transfer of ownership. Partial transfer of ownership means that until the loan is paid off, the car is co-owned by the bank; there will be an appropriate note in your registration card. This is to ensure that the borrower does not resell or significantly modify the car without notifying the bank. Conditional transfer of ownership, on the contrary, means no such note in your registration card in exchange for the bank becoming the sole owner of the car if there are delays in installment payments.
What else, if not a loan?
If your financial situation is satisfactory and you can afford to pay a lot upfront, take a moment to check a couple of 50/50, 40/60 and 60/40 offers. This type of car loan requires payment of 50, 40, or 60% of the price upfront while the balance payment is delayed by e.g. a year. If you own a business, you may also save a lot if you take out a lease. More and more financial institutions offer consumer lease that doesn’t require you to be an enterpreneur, which means one more option for you.