Every year around the end of January the Autofestival frenzy hits Luxembourg.
Everywhere you go, especially on the radio and mobile apps, all you see are interesting offers for new cars. And my acquaintances ask: how can it be that car dealers offer better financing deals than banks?
Well, sometimes they do, sometimes they don’t. And in order to compare them, we need to make sure we’re comparing the same thing.
Apples and oranges
When comparing where you can get the cheapest loan you need to include all the costs related to the loan. Are there any additional fees, now or in the future (for example for delaying one month’s payment or repaying your loan early)? Also make sure you are comparing loans of the same duration – as you can read in this article, generally speaking the longer your loan is the more expensive it will become. Finally, when dealing with your main bank, where you also have your savings and maybe other investments, you might be in a position to negotiate an advantageous rate for your personal loan, as the risk assessment of your financial situation will include these other items.
Total cost of the loan
Car dealers advertise extremely low interest rates of close to 0%. In order to be able to offer consumers this rate, the dealer usually needs to bear part of the cost; which they pass on to the client by limiting the price negotiations of the vehicle. Shoppers can oftentimes get a good deal on a new car if they are ready to pay cash, i.e. if they get a loan from the bank instead. According to a study of the University of Duisburg-Essen in 2011, the price reduction on the most sold car models ranged from 8% to 23.7 % (with an average of 14.6%). If you can lower the total amount you need to borrow from your bank thanks to the reduced price negotiated due partly to the fact that you are paying cash, you might be paying overall less interest rate at a 2% rate than at an almost 0% rate!
Be good at money and do the maths before deciding!
