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Car Financing with Residual Value and Installment Loan

You have financed a car with residual value. You are reaching the end of your credit contract. You must therefore pay the residual value of your vehicle – usually 40% of your vehicle’s value. What options are available to you? Let’s take a closer look.

Three possibilities ahead of you

The catalog value of your new vehicle was €30,000. You have partially financed the car over five years and borrowed 60% of the vehicle’s value, which is  €18,000. At the end of your 60 monthly payments (five years), you must pay a residual value of €12,000 (which is 40% of the vehicle’s value).

Three options:

a.    You have the liquidity and you pay the €12,000 in cash ;

b.    You plan to change vehicles and sell the vehicle at the residual value price of €12,000. You then pay back the residual value ;

c.     You don’t have the cash or you keep the vehicle after five years. You have no choice but to take out a classic installment loan for an amount of €12,000.

Car financing and installment loan.

The APR of car financing is much more attractive than the APR of the installment loan which is why if your intention is not to sell your vehicle after five years, you are much better off financing the entire purchase price of the vehicle and not car financing with residual value.

Why is the car financing APR more attractive than the installment loan APR?

Essentially for two reasons: First, car financing with residual value concerns new vehicles and therefore in perfect condition. Indeed, it is only under this condition that the vehicle will still have an interesting residual value on the market. Secondly, the sale of a new vehicle comes with guarantees that a used vehicle cannot offer and therefore the APR is higher.

Conclusions

If you want to buy a new vehicle and sell it after five years, choose car financing with residual value. If you want to keep the vehicle after five years, opt for the full financing of the car.

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