Will it be time to change car to something newer or bigger? For financing a car purchase, you have six options to choose from. Car loans are perhaps the most common and simplest, but not all fit. Alternatives to car loans include private loans and private leasing.
A car loan is a so-called non-life loan. What this means in pure Swedish is that the car itself is collateral for the loan. In a way, it can therefore be said that the type of loan is similar to mortgages.
All car dealers have agreements with banks and credit companies and can offer you part payment at a usually quite favorable interest rate. The reason why interest rates do not go away, even if your finances would be quite weak, is that the lender can take possession of the car if you cannot pay interest and amortization.
The big advantage of a classic car loan is that you get a comparatively low interest rate. It’s an advantage as good as any! At the same time, there are obvious disadvantages, the biggest of which are:
• At least 20% of the price must be paid in cash
• You must have full insurance on the car (involves an extra cost)
• When the loan has expired, there is normally a residual value – this you must pay in cash or use as a cash deposit for a new car.
Private unsecured loans are loans that you can use for anything. Cash contribution for a condominium, a trip to warmer latitudes, a car – yes anything.
With a private loan, you get money in hand to pay for a car, new or used, in full. You do not need to leave any cash contribution. You also do not have to leave the car as security. When you pay with the car dealer or a private person, you are free to use the car however you want. This is the great advantage of using private loans for car purchases.
Of course, there are some drawbacks to note. The main disadvantages are:
• Higher interest rates because the loan has no collateral in the foundation
• There may be limited opportunities to borrow larger amounts (it all depends on your financial situation)
• The ongoing depreciation of the car means that you should pay back as soon as you can
Take out extra on the mortgage
There is no loan that is as cheap as a mortgage. This is something that can be used to reduce the cost of purchasing a new car. With interest rates well below 2%, the interest cost for a new car is only a few thousand dollars a year.
If you own your home today, you can apply for extra mortgages, provided you have room for it. You may know that the maximum loan-to-value ratio is 85%. In addition, you should be aware that an extended mortgage can cause the entire mortgage to be met by the repayment requirements. As a result, you may have to pay considerably more per month to the bank than previously. If you are considering this option, make sure you count on it carefully.
One last thing to mention is that mortgages run with very long maturities that are definitely longer than the life of a car. So you risk being forced to continue to pay for the car long after it is exhausted.
Pay in cash
A cash purchase of a car is, on paper, the smartest way to buy a car. You pay the entire purchase price directly and then you are free to use your car exactly how you want. You avoid all costs and can choose the insurance you consider appropriate. Of course, however, you must have money in the account!
However, there is a downside to cash purchases. It is about losing a return on the amount you pay. In economics, this is called alternative return. If you do not buy the car for, for example, SEK 100,000 directly, you have SEK 100,000 to save or invest to earn interest or other returns. This return may possibly exceed what you may pay in interest on a car loan or private loan.
The issue of alternative returns may not be relevant to everyone. It does, however, highlight the fact that borrowing does not always have to be wrong.
From being a form of financing primarily intended for companies, leasing has grown in recent years to become a very common alternative for purchasing a new car. Note that this is always about a brand new car. It is not possible to privately lease used cars.
Private leasing is marketed as a safe and easy car ownership. It’s not really as simple as just going to the car dealership and getting the keys out, but signing a private lease is a smooth story. The idea is that you have to pay a monthly fee for using the car. This fixed fee includes, among other things, depreciation and service. However, there are some expenses you have to bear for yourself. Fuel is the most important, but insurance can also be charged separately.
There are a couple of obvious disadvantages to private leasing, namely:
• You must use the same car throughout the lease period (normally three years)
• The mileage per year is fixed (usually 1500 km / year) – any extra mileage costs quite a bit
• Extra wear in addition to “normal” is charged extra and it can be quite large amounts
• As the three-year value reduction for a brand new car is large, the monthly fee will be high
Membership loans through unions
Last but not least, we must mention that you who are affiliated with a trade union may have the opportunity to obtain very favorable loan terms. These loans are usually called member loans. Trade unions are major players and, with their large membership numbers, have the opportunity to push interest rates.
If you are a member of the union, you should definitely look into the possibility of subscribing for car loans. Note that you normally have to pay a cash deposit of 20% and that the maximum loan amount is usually lower than that for a “regular” car loan.