As for all credits (housing, consumption …), the cost of a car loan depends on several criteria, some being obvious to the general public, others a little less.
In order to be able to effectively compare the different offers received and therefore to make an informed commitment over time, it is necessary to study them carefully in order to have a global vision of the loan to come.
The main component of the cost of a credit, the interest rate
This is the most obvious and simplest part to analyze. Since a car loan is generally set up over a relatively short period (example: 4 or 5 years), it is usually a depreciable loan.
By definition, the operation of this type of credit is to repay every month a portion of the borrowed capital, plus interest on the loan.
At the beginning of the credit, the part of the capital repaid every month is lower, and therefore the interest part is higher. This distribution is reversed as and when repayments. This does not change the overall cost of interest, it just allows the lender to rake in interest more quickly, to avoid the impact of early repayment or renegotiation.
Borrower’s insurance, elective or imposed
These supplementary insurances generally cover two things: job loss, and health in the broad sense (long illness, disability, death …). They are intended to take over the borrower in case of occurrence of the risk covered.
For example, if the borrower subscribes to a loss of employment insurance, it will take over, under conditions, if the borrower is unemployed.
They can be set up either by the borrower directly, who wishes to cover himself a risk that could arise during the credit period, or imposed by the lender, if he considers that the client risk is high. (example: precarious employment, health problems …).
They obviously have a cost, usually expressed as a percentage of the capital borrowed. We therefore find their impact on each monthly payment, particularly in the amortization table.
Costs taken by the lender
Whether it’s a bank or a specialized organization, online or not, there will usually be so-called processing fees. These costs are justified by the administrative work and the study necessary to set up a credit file.
Flat rate fees are generally negotiable, like the interest rate elsewhere, but it is very difficult to remove them completely. They can be a few hundred euros, which is not negligible in terms of impact when the amount borrowed is not very high.
The lending institution may also, in certain cases and when it considers that there is a risk to be covered, take an additional guarantee in case of default of repayment. This is a very common practice on home loans, a little less on auto loans.
The cost of a car loan therefore depends on several criteria: the basic interest rate displayed, the additional insurances, and the ancillary costs taken by the lender. In all cases, two elements allow to have a complete transparency on the offer that is made.
First, the amortization table, which lists all these fees, maturity by maturity, and which generally indicates the overall cost of credit expressed in euros. If this is not the case, simply add up the total amount of the installments, and compare it to the amount borrowed.
And then, what is called the TEG (Global Effective Rate) makes it possible to compare, on the basis of this single indicator, the various proposals that are made. It is a regulatory indicator, encompassing all the components that weigh on the credit granted. It is therefore very different from the catalog rate, but provides an overall view, in a single figure, of the cost of credit.