You have financed a car with residual value. You are nearing the end of your credit contract. Therefore, you need to pay the residual value of your vehicle – typically 40% of the value of your vehicle. What options are available to you? Here’s an overview.
Three options available to 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 need to pay a residual value of €12,000 (which is 40% of the vehicle’s value).
Three options:
a. You have the cash and pay the €12,000 outright;
b. You plan to change vehicles and sell the vehicle for the residual value price of €12,000. You then repay the residual value;
c. You don’t have the cash or you want to keep the vehicle after five years. You have no other choice but to take out a classic installment loan for an amount of €12,000.
Car financing and installment loan
The APR for car financing is much more attractive than the APR for an installment loan, which is why if your intention is not to sell your vehicle after five years, it is in your best interest to finance the entire purchase price of the vehicle and not opt for financing with residual value.
Why is the APR for car financing more attractive than the APR for an installment loan?
Essentially for two reasons: First, car financing with residual value concerns new vehicles and thus vehicles in perfect condition. Indeed, it is only under this condition that the vehicle will still have an interesting residual value in 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 total car financing.
