How to get the best rate for a car loan?
Auto credit rate
An auto loan is an affected consumer credit. This means that it is intended for the purchase of a specific object, here a new or used vehicle. The borrower must therefore provide the lender with proof of the use of the borrowed amount. The interest rate (expressed as a percentage of the loan amount) is used to set the amount to be repaid by the borrower and can vary from lender to lender.
What is the interest rate?
The interest rate expresses the price to be paid to be able to make a loan, as a percentage of the amount of the credit. For the lender, this represents a remuneration for the service rendered to the borrower as well as compensation for the risk of non-repayment. Overall, it takes into account the duration of the loan, the risks incurred by the lender as well as guarantees. It is fixed at the conclusion of the credit agreement where the terms of repayment are set up. There are two types of rates to keep in mind: the nominal rate and the annual percentage rate of charge.
The nominal rate of a car loan
The nominal rate of a credit is used to fix interest. For some loans, the rates are regulated but this is not the case for a car loan which is an assigned loan and for which the rate is set by the credit institution. Generally, it agrees with that of the market plus a percentage influenced by various parameters such as commercial policy or the risks incurred by the organization. However, there is a rate imposed by law that the credit institution is not allowed to exceed. It is called the “attrition rate” and it is the Banque de France that sets it quarterly and then publishes it in the Official Journal.
The nominal rate fixes the annual interest to be paid by the borrower taking into consideration the loan amount and the repayment term, criteria according to which it can vary significantly. Indeed, the rate can increase significantly depending on the chosen repayment period. The longer it takes, the higher the total cost of credit, even if the monthly payments will be reduced in return.
However, the nominal rate is only a small part of the total cost of credit. It determines the amount of interest on the loan but does not take into account other costs that are added to the amount that will have to be repaid by the borrower. These fees may include taxes, handling fees, costs related to guarantees, insurance premiums … The full cost of the credit can only be calculated with the annual percentage rate of charge (APR). Being below the APR, the nominal rate is often put forward by credit institutions to make the offer more attractive to borrowers. Remember that it is not decisive and that only the overall effective rate will allow you to compare the different loan offers correctly.
The annual percentage rate of charge (APR)
The annual percentage rate of charge is therefore the basis of comparison when you want to choose an auto loan offer unlike the nominal rate which is not the ultimate reference.
The APRC includes all the costs related to the granting of the credit, including interest (calculated on the basis of the nominal rate), the handling fees, the costs of any guarantees and insurance (often necessary in the context of a car loan ) but also any additional charges that may be required by the credit institution. If you want to negotiate for a reduction with the lender, you can do it on the nominal rate of the credit but also on the level of the expenses of file and insurance. That’s why it’s imperative to know the details of all fees in order to get the best rate.
Thus, the overall effective rate represents the total cost of the loan. It comes in the form of an annual percentage and is therefore the best comparison tool when you want to choose between several credits.
How is the overall effective rate calculated?
The interest rate may be fixed or revisable (this is the case in particular in the context of a revolving credit). For a car loan, the APR is fixed, ie it corresponds to the rate of the entire duration of the loan. Thus, its calculation is done by all the mandatory fees associated with it, the nominal rate constituting the main cost of the credit.
The application fees have a significant influence on the APR even if they represent only a small part of the total amount to be reimbursed. They can be fixed for certain credits but most of the time they are proportional to the amount of the loan. They generally represent between 1% and 1.5% of the total cost of credit. These fees correspond to the work done by the credit agency and the time required for stakeholders to study the file of the borrower and set up the loan offer. It is possible to negotiate these fees.
The total cost of credit also includes insurance contributions (borrower insurance). It is an insurance that guarantees the assumption of part or all of the credit in the event of certain unforeseeable events leading to the borrower’s inability to repay the loan. Among them are the death of the borrower, the total and irreversible loss of autonomy (PTIA), the temporary interruption of work, and the loss of employment. However it is optional and if you decide to subscribe to it, it is not obligatory to do it with the credit institution granting you the loan, you can contact the insurer of your choice.
Finally, the overall rate of charge includes the guarantee fees or the actual security costs that are mandatory. It is a guarantee that allows the lender to obtain the payment of his claim on the proceeds of sale (in this case, a vehicle), in case of non-payment on the part of the borrower.
Other charges may be added to the total amount of the credit, for example, fees paid to the banking intermediaries or management fees of the open loan account for the conclusion of the credit agreement.
In summary, the annual percentage rate of charge reflects all the specific or determinable costs and provides a general basis of comparison. The repayment term has a major impact on the final cost of the loan and monthly payments. Generally, the interest rate for a car loan varies between 4.5 and 9%.
What to do if there is a problem with the APR
It is possible to contest an overall rate that is incorrect, illegal or absent. There is very little chance that you will end up in the last case where the APR is totally absent if you apply for a loan from a bank or a professional credit institution. However, if this happens, you have the right to sue the credit terms for five years from the signing of the contract. The organization at fault will then have to pay a fine of 4500 euros and will be exposed to a forfeiture of interest or the replacement of the loan rate by the legal interest rate (0.04%).
It is more common to see an error in the calculation of the overall effective rate. You can then dispute the terms of the credit in the same way, the only difference being the time during which you can challenge it that is five years from the time of discovery of the error and not from the moment of signing . It should not be forgotten that the APR can not exceed the usury rates defined by the Banque de France. In the event that this happens, the lender risks a fine of 45,000 euros, two years imprisonment and will be obliged to repay the amounts unjustly collected. If you ever have a doubt, you can always check the rates of wear on the Banque de France website. For example, in the case of a car loan, the usury rates applying to the 4th quarter of 2016 are 20.01% for loans up to and including 3 000 euros, 12 , 99% for loans between 3,000 and 6,000 euros and 6,95 for loans of more than 6,000 euros.
How to get the best rate for a car loan?
In order to obtain the best rate and thus find the most advantageous offer according to your situation, you can use an online credit comparison tool. This will allow you to have a good overview of the different offers that you can compare according to the amount you need and according to the monthly payments you want to pay to repay your credit. Make sure that the rate of each credit is the annual percentage rate of charge (APR) because it is the one that will represent the total amount you will have to repay.
When you have chosen the credit offer, before signing the contract, do not hesitate to negotiate the interest rate, especially regarding the application fees. top