When considering car financing, you should ask yourself whether you want to finance all or part of the acquisition of your new vehicle. Le financement partiel voiture est mieux connu sous l’appellation financing with residual value at the end of the contract. This choice will have incidents which we briefly analyze below.
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 that it could be a used vehicle which has already lost its market value after a few years.
What is residual value financing ?
Financing with residual value is therefore partial financing of the price of the car. Thus, the borrower only borrows 60% of the value of the car and at the end of the contract, he will have to pay the residual value, therefore the balance, in one go. In general, the residual value is set at 40% of the value of the purchase price of the car.
Which is the most interesting formula : borrow in full or borrow with residual value ?
This is a question that many people ask us, but in reality the question is not posed in these terms. It is quite obvious that someone who borrows the entire 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. €18,000 (i.e. 40% of €45,000). The latter will have a lower monthly payment for 5 years but he will have to pay at the end of the contract in one go, the residual value of €18,000. However, not everyone is able to pay €18,000 in one go.
So who is interested in taking out car financing with residual value ?
The Car financing with residual value is ideal for borrowers who resell their vehicle at the end of their credit contract after 4 or 5 years, i.e. those who change vehicles every 4 or 5 years. Indeed, in this case, this borrower will only finance 60% of the value of the vehicle during the life of his credit contract and therefore his monthly payment will be lower than if he had borrowed the entire value of the vehicle and at the end, he resells the vehicle to a third party or to a garage and then reimburses the residual value of 40%. We therefore understand why this formula is perfectly suited to the acquisition of a new, quality vehicle which will retain a good residual resale value after 4 or 5 years.
Conversely, anyone who intends to keep their vehicle for more than 5 years has a much greater interest in financing the total price of the vehicle’s value.
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