If you are looking to buy a car, motorhome, motorcycle or anything else with an engine but are unsure what type of car or motorcycle you want to buy, a loan certificate or loan commitment can be helpful to know what you can afford to buy.
A loan certificate or loan commitment is a pre-approved loan where you are told in advance how much you can get in loans for a car, motorcycle or other vehicle.
What you can afford vs what you should use
A loan certificate tells you in advance what the bank thinks is a maximum loan amount that you can spend on your car purchase.
This does not mean that it will be a smart idea to maximize the loan in order to buy a car, but the loan certificate is useful in that it puts some sort of “ceiling” on what the bank thinks you can afford to buy.
Advantages of car financing in advance
Knowing in advance what kind of car, motorhome, motorcycle or vehicle you can afford to buy has its benefits.
- Saves time
You don’t have to start the application process after finding the car or vehicle you want to buy. You can also “hit” if you come across a bargain online or at a retailer.
- Focus on those you can afford
The loan commitment gives you a clue as to what the bank thinks is a maximum loan amount for the purchase of a car or vehicle.
By knowing in advance how much you can borrow, you can focus on the price group you have financing and loan commitments on. You can sort away those that are too expensive.
- You know your interest rate
By applying for a car loan you know in advance what kind of interest you will receive. You no longer have to accept the financing that the dealer offers, unless they can offer better conditions of course.
By knowing what kind of interest rate you have, you also know if the interest rate a professional car dealership offers will be a good deal.
Keep down payment time low
Most often it will not be the interest rate, but the repayment period which indicates whether a loan is expensive or cheap. Loans with short repayment periods have higher monthly installments, and it is wise to save money on interest.
The faster you can repay a loan, the more you will save.
You can of course put a longer maturity on the loan to get a low minimum amount to pay each month. Some people choose a lower monthly amount and longer maturity, rather than pay down extra on the loan.
Equity on car loans
Equity through car loans will mean that you always have a little to go on if you are going to sell the car before the loan is repaid. If you fully finance the car purchase you may find yourself in a situation where the loss of value of the car is higher than the repayment of the car loan. Then you often have to take out an unsecured loan to cover the deposit and get rid of the car.
Equity through car loans or pre-financing will also give you the best interest rate. At WillSave Bank you can get interest from 3.45% at 35% equity, against 5.85% at 100% financing.