Nowadays, almost anyone can afford a new car. If it is not bought and paid in cash, one can take a loan, lease or hire a car. Each of these solutions is subject to other rules.
In accordance with the survey conducted by ARC Rynek i Opinia upon the request of Volkswagen Financial Services in May 2021, 85% of the surveyed declared that they paid for their used car in cash. This method of financing cars that are already in the market should not be surprising to anyone. Cars with a history of a few years of use can be bought for several thousand Polish zlotys.
But the situation is completely different for brand new cars purchased from car dealers. The prices of new models start from several dozen thousand Polish zlotys. For this reason, an average citizen rarely can afford to buy such a car and pay in cash. Even if someone is extremely determined, it takes at least a few years to collect the appropriate amount. But obviously, no one would like to wait so long and people usually need a car now. What can they do then?
Fortunately, the lack of sufficient funds is no longer a problem. The purchase of a new car can be financed with a loan or in other ways. And if you do not want to have such liabilities, you can choose a lease or long-term hire.
The best car loan – what are the options?
If you choose to take a bank loan to pay for the purchased car, you have two options: either to take a standard car loan or to take a cash loan intended for such purchase.
Car loan. What should you know?
Many banks offer car loans. You should be aware that this type of financing instrument is only intended for the purchase of a vehicle (car, motorcycle, scooter, yacht, etc.). This means that the money obtained from the bank cannot be spent for any other purpose.
What should you do to get the best car loan? The key condition to obtain such a loan is to establish security on the purchased vehicle in favour of the bank. Such security may take one of the following forms:
- transfer of title to secure loan repayment
- registered pledge
- assignment of rights and obligations under third-party liability insurance and accident and theft insurance policy
- leaving a vehicle history card in deposit.
Does it sound too complicated? Let us explain everything. Transfer of title to secure loan repayment simply means the transfer of ownership rights from the debtor to the creditor (in this case from the car buyer to the bank which has granted a car loan). When the vehicle buyer has repaid all its liabilities to the bank, he or she will regain all rights. But until then the bank will be the legal owner of the car.
Registered pledge on the car is another form of security in which the buyer of the car retains ownership rights but if he or she stops repaying the loan, the bank may take over the car to satisfy its claims.
Every car admitted to driving on roads should have valid third-party liability insurance. In the case of a car loan, banks often require also additional accident and theft insurance. In order to secure their interests, they may also require that the borrower should assign his or her rights under the policy. This means that when procuring insurance the car owner should make a proviso that any potential compensation (or a part thereof) should be paid in favour of the bank. For example, if a car purchased under a car loan is stolen, the funds will be paid by the insurance company to the bank and not the car owner.
The latter form of security of car loans is the placement of a vehicle history card in deposit. In this case, no formal requirements must be met. It is sufficient for the buyer of the car to just give the bank the vehicle history card to keep in deposit. What is the purpose of that? It is not possible to sell the car or make any amendments to the registration card without the vehicle history card. In practice, it means that any steps in relation to the car require consultation with the bank. After the entire loan amount has been repaid, the vehicle history card is returned to the owner.
When is it a good idea to take a car loan? For sure, when we do not like to fulfill formal requirements and are eager to have someone else handle them for us. In the event of the purchase of a new car, it is usually an employee of a showroom or another authorised person who will take care of everything in relation to the loan. If it is not a problem to you that throughout the loan term you actually have no freedom in the disposal of the car, this may be the right solution provided that the costs have been calculated earlier.
What if you need a loan but would rather not make your decisions with regard to the use of the car-dependent on the bank? Then a classic cash loan is a right solution.
Cash loan. Another way to pay for the purchase of a car
A cash loan can be used to finance both the car purchase and many other liabilities which require greater financial expenses. Banks are usually not interested in inquiring what the loaned cash will be used for. Those who intend to use such a loan to cover the costs of car purchase do not need to fulfill any additional formal requirements related to the establishment of collateral on the vehicle. Unfortunately, in comparison to a car loan, a cash loan bears slightly higher interest, which in practice means higher expenses.
You do not need to appear at the bank in person if you want to take a cash loan. An application can be easily filled via the Internet. If you are lucky, you can even get the bank decision on the same day. But please remember that the time after which you are granted a loan will depend on your creditworthiness. If you have a credible source of income (e.g. an employment contract), the bank should easily grant your application.
When is it a good idea to take a cash loan if you are planning to use it to pay for the car purchase? This option should be considered mainly by individuals who want complete freedom in the disposal of the purchased car and funds allocated to this.
What should you do if you cannot take a loan to buy a car for some reason or if you simply do not want a loan but you urgently need a car? Then you have two other options.
Car lease. How does it work?
A lease is a type of contract where one of the parties gives the other party the right to use a specific object for the agreed time in return for regular payments (leasing fees). In this case, the object will obviously be a car.
Not so long ago lease was mainly associated with corporate cars. But currently, consumer lease addressed to individuals is becoming more and more popular.
In case of a consumer lease of a car, the lessee, or the user of the car, transfers an amount specified in the agreement to the lessor’s account every month. In return, the lessee may use the car but is not its legal owner. But lease relies on the idea that upon the expiry of the agreement, the car user may purchase it and become its owner.
When is it a good idea to take a car in the lease? The majority of lease companies use a simplified method of verifying the customer’s financial capacity and the decision is issued based on the income data presented by the lessee. What is more, a leasing fee also includes the costs of insurance, servicing, or courtesy car. Therefore, the car user need not organise these objects on his/her own. For this reason, a lease is a good idea, for example, when you would like to limit formalities related to the purchase and use of the car to the minimum.
When you do not want to be a car owner – long-term hire
Long-term car hire in practice resembles the use of a car in lease. However, in the case of long-term hire you actually cannot buy back the car after the agreement comes to an end. Yet there are companies in the market that offer such an option. However, it is usually not a financially advantageous option. Similar to lease, long-term hire is based on an agreement concluded by a person who hires a car and the hiring institution. When the agreement is drawn up, the person hiring the car must declare the projected annual mileage. Based on that, the amount of a monthly fee and the final valuation of the vehicle are prepared. The regular fee also includes insurance, servicing, etc. The difference between the lease and long-term hire is in the amount of the monthly fee. Long-term hire is based on the assumption that after 2 to 4 years the car user will exchange it to a new model.
When is it a good idea to choose long-term hire? Definitely when you do not want to disclose your income for any reason. But you should remember that some companies hiring cars require that customers should have their own contribution in the amount of 5-10% of the car value. But this is not a standard and usually concerns premium cars.
Consumers looking for a new car have a range of financing options to choose from. However, if they do not pay for the car in cash but take a loan, they should remember that until the repayment of all liabilities the car will actually not be their property.
The same is true for lease or long-term hire. Thus, it would be hard to identify the best solution as everyone should consider the solutions appropriate to their current economic situation.