how car finance works 2021 Buying your own car is the dream of many Brazilians. But the money to pay for the vehicle at once is not always available. This is a case in which credit can make a dream and the acquisition of assets viable for those who would not be able to do so without this impulse. That’s where car financing comes in.
It is the most used form of payment in Brazil to acquire this good. According to the 2020 annual bulletin of Anef (National Association of Automobile Financial Companies), 52% of purchases of so-called light commercial vehicles that year were paid for with financing. apply for car finance
What is Car Financing
The vehicle financing is a type of loan in which the institution extends credit to the customer for the purchase of a car, motorcycle or other vehicle. In the operation, the financial institution transfers the amount of the loan made to the customer to the store to pay off the value of the good.
The loan is repaid in monthly and usually fixed installments. Like any such operation, it has interest rates, fees and insurance, in addition to the IOF (Financial Operations Tax).
how car finance works 2021
In this operation, the car serves as loan guarantee to the lender. Therefore, this line has lower interest rates than other types, such as ordinary personal loans or overdrafts.
The number of installments varies from one contract to another. In general, after the customer’s credit analysis, the institution offers shorter financing options, with smaller installments, or longer ones, with cheaper installments. And the consumer chooses the one that he judges to be best for his conditions.
The more installments the financing has, the higher the interest rate charged tends to be. This is a factor that enters into the calculation, because the credit will take longer to be paid off, which may increase the chance of it not being paid.
The vehicle document is in the buyer’s name, but he cannot transfer it before paying off all the financing. This is because the credit transaction is also registered. It is called the encumbrance . When finished paying, the consumer must ask the financial institution to remove this lien from the vehicle with the Detran of their state.
If the installments are not paid, the vehicle can be seized by the financial institution that granted the credit to compensate for the loss. That’s why it works as a guarantee of the operation.
Importantly, this is only done after many attempts to reach an agreement. After all, it is in the bank’s interest to receive the value of the operation and the consumer to keep the vehicle.
how car finance works 2021
how car finance works 2021 This is the general functioning of the most common type of credit to purchase a car, which is the CDC (Crédito Direct ao Consumidor).
It also allows the borrower to prepay installments or even pay off the credit, if he has the money to do so. These transactions often involve discounts, so if you can get ahead of it, you can save money.
Photo shows a man’s hand fiddling with a calculator on a table, on which there is also a white toy car, vehicle keys and piles of coins.
What To Evaluate Before Funding and how car finance works 2021
Before starting the purchase process, it is important that the consumer makes a financial plan.
This assessment includes making the calculations of the amount of the installment he can pay without compromising other daily expenses, such as rent, electricity and water bills, condominium, supermarket and leisure.
Expenses with the vehicle itself must also be included in this account. Fuel and maintenance, taxes and licensing, plus insurance. After all, they will also consume a part of your budget, as the use of the vehicle will entail these expenses.
Car financing step by step and how car finance works 2021
After making your financial planning for the purchase, the search for the car begins. Model, mileage, engine power, mechanical and physical conditions if it is a used car, for example. Everything needs to be carefully evaluated.
Once the vehicle is chosen, the payment phase comes. If it is with financing, the process must involve a search to find the most advantageous offer, according to your planning and payment terms.
Many stores are affiliated with an institution that offers credit for the purchase. Bank customers can also get an offer from the bank where they have an account. Evaluate the best option for you. For this, in addition to the interest rate itself, how car finance works 2021 also compare the Total Effective Cost, the CET, which is the percentage actually charged in the operation and also includes the IOF (Financial Operations Tax), administrative fees, insurance and other fees.
Once you find the best financing offer, close the transaction contract. For this, you will need some documents, such as RG, CPF, proof of residence and income. Better to leave everything separate.
The institution will transfer the amount of credit granted to you to pay for the car at resale. The document, as we said, comes out in your name, but with transfer restrictions – you cannot sell it before repaying the loan.
Also read: See how positive registration works and how car finance works 2021
What percentage of the vehicle can be financed
This percentage varies with the conditions offered from one institution to another.
Some allow up to 100% of the car to be financed. This condition is good for those who don’t have money saved to make the purchase and, thus, need the entire amount. But it’s good to take into account that this alternative may involve higher interest rates sometimes.how car finance works 2021
institutions require a down payment and the remaining amount goes into the credit operation. The percentage of this entry varies from one bank to another. It is paid by the car buyer as part of the settlement of the vehicle’s value.
On the other hand, the consumer may have an amount saved for the operation, even greater than the required down payment. If so, it might be worth using. The larger the down payment, the smaller the amount of interest charged tends to be.
Photo shows several cars side by side, focused on their taillight
Can used or used car be financed? or how car finance works 2021
Yes, he can. The operation is not only aimed at new vehicles, 0 km. The purchase of a used or used car can also be done with the help of a credit.
In this case, there is one more point to pay attention to: some lenders limit the age of the car to be purchased through credit. In general, when there is this limit, it is 10 years of manufacture.
The used car is cheaper and therefore more affordable. On the other hand, if this is your option, pay close attention to the mechanics of the vehicle. If possible, take a trusted professional with you to assess these car conditions.
After all, if it has a problem that you couldn’t detect and that appears right after the purchase, it would be very unpleasant to have to stop the newly acquired item in the workshop for repairs, generating even more expenses, right?
Can the financed car be sold? and how car finance works 2021
No, until the loan is repaid. If you want to sell it before the contract’s deadline, you’ll need to pay off what’s left of the credit.
But the deal can be closed in the following way: the buyer of your vehicle pays a part of the agreed amount to you and the other part is used to pay off the loan. That way he will be able to transfer ownership of the property.
Realize that, in any case, you will always have to pay all the debt with the financial institution to make the transaction.
That’s because a financed car has a lien. It is a release on the registration of the asset to inform that it is linked to a financing contract, serving as a guarantee for the business.
In the case of the car, when the loan is paid off, the institution must inform the Detran of the state where it is registered that the debt is paid. With that, the record will be downloaded in the registry. The vehicle can then be transferred owner.
Also read: What is the difference between simple interest and compound interest?
Replace the warranty car
Over a longer financing, such as 5 years, the buyer may want to exchange the car. But, with the contract still in progress and with no money to pay it off, how to do it?
The answer may lie in the institution that granted the credit. Some of them allow the replacement of the financing guarantee vehicle during the term of the contract.
In this operation, the financing contract is in the name of that buyer, but some changes must be made for the exchange to be carried out.
But there are conditions for this financial transaction to be carried out. The most common are:
a minimum amount of already paid installments of the current contract. There are banks that allow this exchange from 3 installments paid;
that the new vehicle is of a year and model equal to or greater than the current one;
the documentation of the current vehicle must be up to date, with IPVA, licensing and any fines and mandatory fees paid.
Health and extra income
The pandemic brought an extra need to have a car. Commuting in the vehicle itself became a way to escape the crowds of public transport and thus avoid contagion.
In addition, the car can become a tool to seek extra income, being a driver of a transport application or making deliveries in your spare time.
These were two of the three main reasons mentioned as factors for buying a car in a survey conducted by Globo Insights and released in early 2021.
Among respondents who do not have a car but intend to buy one, 55% cited the pandemic as the main reason for making the purchase. The intention to work as an application driver was cited by 14%, and another 14% said they thought it was a good time to buy.
The survey also revealed that 55% of all respondents used the bus as a means of transport before the pandemic, a percentage that dropped to 34% in the post-pandemic period. Car use rose a little: from 40% to 43% of respondents.
Also read: Is it still worth having a car?
Man in front of a car smiles while showing keys to a vehicle.
Those who do not have the money to buy a car in cash have other options to pay for the purchase in installments, but they are less used in Brazil than the CDC, which is traditional financing. We will highlight two of them and their characteristics below:
This modality works like a rental contract with a purchase option at the end. In leasing, as it is also called, the financial institution pays the vehicle for resale and “rents” it to the person who wants to buy the car.
Throughout the contract, this customer pays the installments, which work as rents. In the end, he can renew the contract, terminate it or buy the property from the lessor, paying the remaining amount. The possibility of acquisition is provided for in the contract.
A feature of leasing is that the car is in the name of the lessor, not the borrower, as long as the lease is in effect.
Another point is that it does not allow for early payment of the loan, which, in traditional financing, often makes it possible to deduct interest and other fees.
The installments are usually fixed and the person who makes the transaction with the finance company knows the amount he will pay as soon as he closes the deal.
The consortium is not a classic financing. The person interested in buying the car is part of a group with other people who also want to buy a vehicle. This group is organized by the consortium administrator.
People who are part of this group pay monthly installments that vary according to the price of the vehicle they want to buy. So, he doesn’t have as much predictability in terms of values. In addition, the administrator charges a fee to manage the group.
To receive the vehicle being paid for, there are three possibilities. One of them is the monthly draw, in which the person drawn receives a letter of credit to make the purchase. Another is when the consortium members offer bids, which are installment advances. In general, this round is also monthly and whoever makes the highest bid wins.visit
Finally, if they were not drawn and were not able to bid during the contract, the person receives the letter of credit to purchase the vehicle at the end of its term.