Does car financing with residual value apply to used vehicles?
In principle, no, because the residual value is paid in terms of the contract after 4 or 5 years. This payment therefore excludes the possibility of it being a used vehicle that has already lost its market value after a few years.
What does financing with residual value consist of?
Financing with residual value is therefore partial financing of the car’s price. Thus, the borrower only borrows 60% of the car’s value and at the end of the contract, they will have to pay the residual value, the balance, in one go. Generally, the residual value is set at 40% of the car’s acquisition price.
What is the most interesting formula: borrowing the total amount or borrowing with residual value?
This is a question that many people ask us, but the question is not really posed in these terms. It is quite obvious that someone who borrows the total value of a vehicle of €45,000 to be repaid in 5 years will pay a higher monthly payment than someone who borrows €27,000 for the same vehicle with a residual value at the end of the contract of €18,000 (i.e., 40% of €45,000). The latter will have a lower monthly payment for 5 years but will have to pay the residual value of €18,000 in one go at the end of the contract. However, not everyone is able to pay €18,000 in one go.
Who is interested in taking out car financing with residual value?
The car financing with residual value is perfect for the borrower who sells their vehicle at the end of their credit contract after 4 or 5 years, that is, someone who changes vehicles every 4 or 5 years. Indeed, in this case, this borrower will only finance 60% of the vehicle’s value during the life of their credit contract, and therefore their monthly payment will be lower than if they had borrowed the total value of the vehicle. At the end, they sell the vehicle to a third party or a dealership and then repay the residual value of 40%. This is why this formula is perfectly suited for acquiring a new and quality vehicle that will retain a good residual resale value after 4 or 5 years.
Conversely, someone who intends to keep their vehicle for more than 5 years has much more interest in financing the total price of the vehicle’s value.
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