The three-way financing is characterized by initial minimum installment payments. Initially, only the loss in value of the car is financed.
At the end of the period of three or four years, the driver can decide between three further ways of proceeding: the repayment of a single final installment, the taking out of a financing loan or the return of the vehicle.
All facts about the guide “Three-way financing” at a glance:
- In three-way financing, the borrower pays only a minimum rate over a period of time.
- At the end of the term, he may choose between the repayment of the final installment, the follow-on financing or the return of the goods.
- This financing is ultimately more expensive and therefore only suitable for the undecided on a budget.
1. What is a three-way financing?
The three-way financing is mainly found in the automotive industry. It is characterized by the fact that the rates are kept low until a certain point in time. This will give car buyers a bargain. At the end of the term, they can then opt for one of the three variants.
Either they pay the entire closing rate or they make a loan with higher installment payments or they return the car to the dealer. Especially for undecided, who do not yet know which type of financing fits best with their lives, this model offers.
Basically, the first part of the three-way financing can also be compared to leasing a car. Both models finance the loss of value of the motor vehicle over time. At the end of the term is still a big chunk, which must be financed. As a rule, the three-way financing is expected to run for 36 to 48 months. This leaves the borrower enough time to think about whether and how further financing is worthwhile.
The principle of three-way financing
The rates are so low that the borrower can continue to save money while doing so. This is a relief at a young age when the future is open and not every path has been defined. Thus, the beloved car – the innermost concept of freedom – can be financed despite uncertain fate. Under these circumstances, no bank would grant a loan anyway. The risk would be far too great to be in financial difficulties due to job changes and possibly associated moves.
2. The repayment of the final installment
The first option after the minimum installment has expired is to pay the final installment in one fell swoop. This should be feasible in theory, since the installment payments are kept very low. On the one hand, it is possible to pay the monthly installments to the dealership and, on the other hand, make monthly payments to a savings account. With well-interest-bearing accounts, one could even expect interest -rate financing here.
The prerequisite for this is that it has been clarified in advance how high the purchase price to be paid will be at the end of the minirah payment. This would make it possible to create a financial plan. In the event that it gets close to a month, the savings rates could be reduced or suspended, without any consequences.
An exaggerated example:
At the end of the minirates, which have a term of 36 months, there is still a purchase price of 10,000 euros to pay. That makes a monthly installment of 277.78 euros, which could be saved monthly in a financial investment.
If this money is now invested in a savings system that would, for example, have an annual interest rate of a sensational 10 percent, this would amount to a final amount of EUR 12,136.76 after three years. That makes a plus of 2,136.76 euros and can be immediately invested in a set of winter tires.
The final amount is calculated as follows:
Year 1: 277.78 euros x 12 months x 1.1 (10 percent) = 3,666.69 euros
Year 2: (3,666.69 euros + 277.78 euros x 12 months) x 1.1 = 7,700.06 euros
Year 3: (7,700.06 euros + 277.78 euros x 12 months) x 1.1 = 12,136.76 euros
This would allow a car to be cleverly financed and used right from the start. The loan is paid off with a blow and the art of saving may continue to apply to for possible repairs and the purchase of a new car – to build up reserves – after service.
When repaying the final installment, a final installment will be paid after a prolonged period of time in which only minimal installment payments have been made.
3. Follow-up financing – this is how it works
Now, not everyone is able to pay two installments with his monthly salary. And not everyone is willing to try this. Otherwise, the entire financing would have been offered by a loan from the very beginning. Germans in particular tend to regard the car not only as a commodity, but to combine emotions such as pride and well-being with a car. It is not surprising that many borrowers use the option of follow-up financing here.
This can be done either through loans at the dealership or with another financial service provider. Basically, here is the classic credit. The installment payments are higher than at the beginning. As is usual with a loan, however, the borrower has to bring with it a few conditions. First of all, he should have been able to pay the monthly mini-credit installments in advance. If it has already come here to payment delays, the dealership will agree to another loan difficult.
The usual requirements, which are made to a borrower, can be found in the guidebook “Credit Requirements: Who has what to fulfill?”.
For follow-up financing, additional installment payments will be made at the end of the minimum installment payment to fully finance the car.
4. The return of the goods
The third way of three-way financing is the return of the car. This will conclude the contract with final effect and a new three-way financing can be tackled – or another financing concept. Here is to be noted however that all investment deductions will be set off when returning. So all scratches and bumps, which in the car in the three to four years into the car whether self- or Fremdentschuldschuldet were driven, will be charged to the borrower.
As a result, with the delivery of the vehicle key, a hefty bill can still be paid to the borrower. Paid depreciation includes only the reduction in fair value, but no impairment.
5. Pros and cons of three way financing
The advantage is the flexible design of the financing. The user has three or four years to settle his finances and to be clear about his possible credit line.
But this flexibility comes at a price. If you choose the follow-up financing you pay in the end a much higher effective interest rate than a classic financing. If you choose the return model, you have to ask yourself if the lease would not have been cheaper.
More disadvantages, as advantages
It offers real advantages only to those who, for whatever reason, can not decide on a type of financing.
6. The conclusion: The three-way financing is more expensive than a loan
If the user is able to take out a loan, he should do so. Financing through the three-way financing is only cost effective at first. The flexibility is paid by long terms. As a result, the interest payments add up, so that the effective interest rate is higher again.
However, it is not granted to anyone to get a loan. Here, the three-way financing offers a successful alternative to find a way out of the personal financial crisis with low installment payments. For young people still in education, however, leasing would also be a form of financing.