Car loans have become commonplace today and many cars on Russian roads are currently on credit. Statistics show that most citizens today spend about 20% of their monthly income on car payments on credit. By the way, this monthly amount totals approximately $9 billion.
However, our car loans have not yet reached such turnover as in other countries. Thus, in America, about 80% of cars are purchased on credit, that is, the vast majority, and in Europe - about 60%. In Russia, car lending is still only gaining momentum, so many banks are coming up with more and more new banking products for car loans. A fairly new type of car loan has become just such a product - a car loan with repurchase or buy-back. What does this mysterious combination of words mean? Buy-back is literally translated as buyback. And in fact, it is not exactly a car loan, but rather an alternative. Having understood the essence of the product, everyone will choose for themselves what is more profitable for them: a car loan or a buyback.
Who is the buyback intended for?
Buy-back was developed specifically for those car enthusiasts who like to change cars every 2-3 years in order to constantly drive new cars.
The main idea of this program is that the borrower pays only part of the loan, usually from 15 to 50%, and not the entire cost of the car, as with a regular car loan. During this time, while the borrower is paying off the car loan, he drives it. And as soon as the amount of his payments ends (not the whole amount, but that part of the cost that is provided for under the contract), the car owner can do it in different ways - return the car back to the bank and take another one, return it and no longer take out cars on credit, or pay for the car further and continue driving it, or start selling the car yourself, so that you can later pay off the bank and, perhaps, be left with a profit.
If a car owner does not have the funds to pay the bank for the car, but he wants to keep it, then he can take out the remaining amount in installments for 1-3 years, until the loan is fully repaid. The same scheme is possible with the participation of a car dealer. In this case, the car enthusiast returns the car to the dealer, and he then decides what to do with it - sell it and repay the debt to the bank, or give it back to another car enthusiast. In this case, the car can also act as a down payment on a new loan. This program makes a car loan more affordable for car enthusiasts, first of all, the amount of loan payments is reduced, and you can also purchase an expensive and high-quality car much cheaper in this way, by paying only a down payment of 15%. Since the total amount of loan payments decreases, the monthly payments also become much smaller.
What is the approximate calculation
If you choose a car worth $35,000, you will be provided with a loan for up to 3 years, and the down payment will be about 20% of the cost of the car. The interest rate on the loan will be approximately 11% per annum. If you choose a standard car loan, your monthly payment will be $635, and if you choose a buyback, your monthly payment will be $360 per month.
So, to drive a $32,000 car using the buyback program, you would need to pay $309 a month if your income was $924 a month or more.
The main advantage of this program is that after 1-5 years, you can sell your car back to the dealership for the price that was agreed upon in advance. After which you can no longer buy cars, buy a new car under the same program, or do it at another dealership.
Of course, not everything in the program is so smooth and cheap, otherwise everyone would do nothing but decorate cars in this way. There are additional fees and charges that make the buyback program loan a little more expensive. In addition, not all car dealerships and banks allow you to use this program, but only a limited number of them. Dealers must have appropriate permission to use such a program and an appropriate agreement with the bank.
Disadvantages of buybacks
The main thing, not even a disadvantage, but a difficult-to-fulfill condition of the buyback program is the fact that at the time of its return to the dealership, the car must be in perfect condition, both technically and externally.
If there is something wrong with the appearance of the car or it has been in an accident, then the car dealership will, of course, buy the car back from you, only at a completely different price.
Some car dealerships set a certain mileage limit on a car that cannot be exceeded. That is, you can only travel a certain number of kilometers by car. If you exceed this limit, the price of the car will also be significantly reduced.
The big disadvantage of the program is the fact that in the end you end up with a large overpayment. The principal debt on the loan is deferred until the last moment, and interest is accrued on the entire amount throughout the loan term. Unlike other loan products, where interest is charged on the remaining amount, which is constantly decreasing. The program also contains various interest and commissions that are charged by the bank for processing a loan and issuing it, for annual banking services, for loan insurance and much more. As a result, over the course of a year you will have approximately $3,000 to $5,000 in additional payments, and so on for each year of the loan.
Of course, the car is then purchased at the price it was worth at the time the contract was concluded. Some will say that this is not fair, because car prices are rising. In defense of banks and car dealerships, we can say that they are always not against the borrower selling the car on his own and paying them the required amount. If he can sell at such a price that he still wins, then no one will demand this profit from him.
Translated from English, Buy-back means buying back. The loan is issued for 3 years. The client makes an initial payment of 10% to 50%. Part of the principal debt 20% - 40% of the cost of the car is frozen for 3 years - this will be the last payment. The remaining debt is spread over 36 months. Monthly payments are lower than a standard loan.
The client repays the loan strictly according to schedule and after 3 years he will have a choice. He can pay the bank the rest of the debt and drive home by car. If there is no money to pay off the debt, then the car dealership buys the car, the borrower pays off the debt and goes home on foot. The car owner can renew the loan at the dealership and continue making payments. Or the client gives the car to the dealership, the money goes towards the debt and the down payment on another new car. As a result, the client takes out a new loan and goes home in a new car.
The main and main advantage of such a loan is small monthly payments. Due to this, buying a car has become more affordable. There is an opportunity to buy a car with a richer package or choose another car, prestigious and more expensive. The reduction in the amount of payments occurs due to the freezing of part of the principal debt. As a result, the client receives a deferred payment, which will need to be made in 3 years. The size of the final payment is 20 - 40%, at the client's choice, of the cost of the car.
On the one hand, such conditions seem very favorable and it would be foolish to refuse such a loan. However, not all so simple. The secret is hidden in the loan formula. As a rule, the monthly payment consists of two parts - principal and interest. In order to reduce the payment, part of the amount is removed from the principal debt, but the amount of interest remains. Thus, the client pays less money towards the loan body each month, and the interest is the same as for the full loan amount. Therefore, the overpayment on the loan will not even be much more than that of a standard car loan.
Before getting into debt, you need to check which loan is the most profitable. Let's compare a Buy-back loan with a consumer loan and a regular car loan. You can calculate a standard loan on the website http://calculator-credit.ru. You can calculate a Buy-back loan on the official VTB 24 website.
We will calculate a loan of 300,000 rubles for a car worth 600,000 rubles, with a down payment of 300,000 rubles. The last payment will be 20% of the cost of the car, 120,000 rubles. Please note that terms and interest rates are subject to change and may therefore be different. We will calculate CASCO insurance approximately, the first year is 40,000 rubles, for three years 90,000 rubles. Life insurance for 3 years 25,000 rubles. As a rule, CASCO and life insurance are included in the total loan amount.
The lowest interest rate is for a buyback loan at 8.9%, a car loan at 11.58% and a consumer loan at 17%.
Monthly payments are the lowest for a Buy-back loan, followed by a consumer loan and a car loan.
The largest overpayment will be for a car loan, followed by Buy-back, then consumer.
This calculation shows that the most profitable loan is a consumer loan, because it does not have CASCO insurance. However, the Buy-back loan is ahead of everyone in terms of payments; every month you need to pay 8864 rubles. But after three years, the loan will not be repaid and you will be left with a debt of 120,000 rubles. If you don’t have money for the last payment, you will have to extend the loan at the car dealership or take out a consumer loan. Therefore, the overpayment on the Buy-back loan will be the largest. Consequently, a loan with buyback may be the least profitable loan, but with the most comfortable monthly payment.
A loan under the Buy-back program provides the client with a comfortable payment, the opportunity to buy a car with expensive equipment, as well as sell it after 3 years and buy a new one.
The disadvantages include a large overpayment for life insurance and CASCO. Most debt is carried forward into the future, so you need to anticipate your income. The estimated value of a car when purchased by a car dealership may be lower than the market price.
You can buy a car using this loan program when you need to reduce your monthly payments and transfer current expenses to the future. If you want to save money, it is better to take out a consumer loan.
If you want to buy a car in installments, you can take advantage of several opportunities that banks and leasing companies offer today. Today, this area is actively developing, as both the number of credit institutions and the variety of programs offered are increasing. One of the new opportunities for buying a car is a buy back loan, that is, a loan with the subsequent return of the car to the dealer on favorable terms. This practice has been common in the West for a long time, but in Russia it is just beginning to gain popularity. What does a car loan with buyback mean, and how does this system work?
Loan with redemption: how does it work?
If you are going to buy your first car, then banks can offer you a rather non-standard solution: a car loan with deferred payment. How is such a transaction carried out?
- The borrower receives a loan from the bank to purchase a new foreign-made car, and he makes a large down payment - at least 15% of the total cost of the car.
- The bank establishes a deferred payment: up to half the cost of the car can be paid at the very end of the term, and until then the borrower can pay off part of the debt in very small equal payments at a not the highest rate.
- At the end of the term, the borrower sells the car to the dealer and receives enough money to pay off the remaining balance of the loan and make a down payment on a new car.
- If the borrower does not want to part with the car, then he will have to repay the debt at a high interest rate in a short period of time (usually 1-2 years). Such programs most often apply only to new expensive cars, so we are talking about significant amounts.
As a result, if you use the buy back system, you will actually have to pay no more than half of its cost for the car, sometimes all payments are only a fifth of the original price. After 2-3 years, you may still get tired of the car, and you will have to sell it. The dealer will help you with this, and you can immediately purchase a new car under the same conditions.
This calculation system is suitable for those who are used to changing cars frequently, which is why it has especially taken root in the West. According to the buyback system, it is unprofitable to keep the car for yourself: most of the money for it will have to be paid at an increased rate, in addition, the debt will have to be paid off quickly. A buyback system is beneficial for a car dealership, as it helps increase turnover and secure regular customers.
However, it is clear that even after 2-3 years of use the car must be in excellent condition: if the salon refuses to accept it or sets a price that is too low, you will have to repay the balance of the debt to the bank yourself or pay the next down payment yourself.
In civilized Western conditions, with good roads and high quality fuel, cars live much longer, so such conditions are quite feasible. In Russia, after only 2 years, a car may become illiquid, especially if the owner paid little attention to its condition.
Other options for buying a car in installments
A car loan with buyback is not the only opportunity to purchase a car with maximum benefit for yourself. The question is often asked: what does it mean to buy a car from leasing banks? Leasing is a system of purchasing a car in installments through rent. What does it mean to rent a car with an option to buy?
Rent-to-purchase involves the client renting a car for a certain period of time and paying fees for its use. The amount of contributions will ultimately be equal to the full cost of the car and the company’s profit for the services provided. When the lease period ends, the client makes the final redemption payment, and the car becomes his full property. Leasing has become popular due to several advantages:
- This is an opportunity to get a car in installments without resorting to the services of banks. Not everyone can boast of a clean credit history and stable official income. If banks refuse applications, leasing may be the only way to purchase a car.
- Rent-to-own is beneficial for companies because it allows them to avoid paying property taxes. Formally, the car remains the property of the company providing leasing services for the entire rental period. However, in some organizations the amount of transport tax is simply included in rental payments, and savings cannot be achieved.
- The lessor is responsible for the car: insurance, timely maintenance, negotiations with insurers in case of accidents and any other troubles. The lessee will only be obligated to fulfill the terms of the contract, and the lessor must take upon himself all concerns about the condition of the car.
- This type of rental allows you to avoid paying a large down payment. For many, this is a serious obstacle to obtaining a bank loan. Leasing allows you to pay for the first month of rent, and then decide whether it is worth continuing to pay the money, or whether it is better to look for another car.
However, what does rent-to-own mean for the tenant? Until the very last payment, the car will not be considered his property, and the contract may be terminated due to violations. As a result, you can lose all the money you have already invested in the car, since it is only considered as a rental payment.
The company has the right to make such a decision due to delays, non-payments and other deviations from the contract, even without a court decision.
Which option should I choose to buy a car?
The choice of a lending or leasing program will depend only on the specific situation, since it is difficult to say which option will be the most profitable. Leasing is used much more often by entrepreneurs than by private borrowers; lending, on the contrary, is more suitable for those who buy a car for personal use.
Among the variety of partner car loans offered by domestic banks and car dealerships, loans with buyback occupy a special place - “ buy back" Below we will look at the features of repaying such loans, as well as the hidden disadvantages of buy back programs.
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Buy back program
The main feature of a buy back car loan is that the client can repay not the entire loan amount, but only part of it - 55-80% (excluding the down payment). Repayment of the remaining 20-45% of the debt under the buy back program is postponed until the very end of the loan term, but interest on this amount is accrued and paid by the client monthly.
At the end of the buy back car loan term, the client pays off the balance of the debt or sells the car to the dealer. In some cases, the borrower can extend the repayment of the loan for several years (depending on the balance of the outstanding debt) or sell the car not to the dealer, but to any other buyer - such a possibility is agreed upon in advance in the terms of the loan agreement.
When buying a car from a borrower, the dealer transfers money to the client’s account opened by the creditor bank. The bank can either credit the difference remaining after paying the balance of the buy back loan to the client’s account or, at the latter’s request, use it to pay the down payment on a new car loan.
Car loan buy back: disadvantages of the program
For a buy-back loan, monthly payments are lower than for a regular loan, but the final overpayment for a buy-back loan is almost always higher. In addition, the buy back program, as a rule, is issued at a higher rate than a regular car loan - for example, in Raiffeisenbank branches you can get a classic car loan, the rate of which is 0.5 percentage points higher. lower than a buyback loan.
In addition, according to the terms of most partner buy back loans, the credit car must be serviced exclusively at the service centers of the selling dealer. Before purchasing a car, dealership representatives require the borrower to provide documents confirming that they have passed a mandatory technical inspection. The dealer may also refuse to repurchase a car damaged in an accident at the price stipulated by the terms of the preliminary purchase and sale agreement.