AutoPortal has already introduced its readers to how car prices are formed in Ukraine. To help our readers better navigate and understand how the system of relationships works, let's first describe the possible ways to buy a car on credit and the hidden overpayments that may arise.
About the basics
Let's start with traditional interest-based lending schemes. Today, there are two main approaches — the so-called classic scheme and the annuity scheme. The key difference between them is that in the first case, interest is charged on the remaining debt, while in the second, it is charged on the entire loan amount. With the same interest rate, the total overpayment under the annuity will be higher. To make this clearer, let's provide a table with payment calculations.
What usually makes a client choose one scheme or another? As can be seen from the table, the remaining principal after half the term is always higher with an annuity. Accordingly, if you plan to repay the loan early before the middle of the term, an annuity may be more advantageous. If early repayment is not planned or will occur in the second half of the term, it is more logical to choose the classic scheme. This holds true for loans with a term of two years or more. For loans up to one year, an annuity is disadvantageous in any case.
Usually, equal payments are chosen by those who cannot make the high down payments typical of the classic scheme. At the same time, they are aware (or not?) that the overpayment will be significantly higher. The increased cost is a kind of payment for the opportunity to get a car right now.
Everything is clear here. At least in this scheme, it is openly visible how the bank makes money. But sometimes this is not enough for the lender, and it finds additional sources of income. These are the so-called "hidden" payments.
"Hidden" payments
Of course, no one hides them, and they are specified in contracts, but they are not mentioned in advertising or informational materials. And if they are mentioned, it is only in footnotes and fine print. What should a client pay attention to when studying the credit scheme and take into account when preliminarily calculating the possible overpayment?
Note that we are talking about "interest-free" loans, where monthly fees are not encountered. Well, or extremely rarely. But a one-time bank fee is always present (paid at the beginning and charged on the entire loan amount). The second thing to know is the inflated cost of credit risk insurance and vehicle insurance. It is no secret that most banks cooperate with insurance companies and receive a certain percentage for each recommended client. In common parlance, this is called a "kickback."
Let's consider the calculation of the loan cost using the example of schemes used in the sale of Renault cars (Logan, Logan MCV, Duster, Fluence, Megane, Sandero, Scenic, Latitude, Koleos, Lodgy, Dokker, Kangoo, Trafic).
For example, let's take a NEW LOGAN Base 1.2, Petrol, 73 hp, with a recommended price of UAH 110,800.00. The loan can be issued for a maximum of two years. Let's consider a one-year option.
To participate in the interest-free lending program, you must make a down payment of 60% of the car's cost. Accordingly, the prepayment will be UAH 66,480.00. The loan amount is UAH 44,320.00.
But to this amount, you need to add the cost of credit insurance. For one year, it will be 1%. Total — already UAH 44,763.20. The loan origination fee is a one-time 2.5% — UAH 1,119.08. We divide the amount itself by 12 and get a monthly payment of UAH 3,730.27.
Additional information: Loan origination fee: 2.5%
Mandatory insurance: CASCO with the option to include it in the loan, civil liability insurance, and borrower insurance at 1% per annum
What can be said — indeed, apart from the initial one-time fee, there are no overpayments. And here our reader asks a reasonable question: what's the catch? Well, it's hard to believe that the bank doesn't earn anything. So let's dig deeper.
Most often, an automotive company works closely with a bank. In the case of Renault, this is a French bank that has long cooperated with the automaker. Their common goal is not only to earn on the loan but also to unload finished product warehouses and stimulate sales.
The essence of the scheme is as follows:
The bank buys the car from the dealership at a discount. For example, a car costs $15 thousand. 60% or $9 thousand is paid by the borrower, and the bank pays the dealership not the entire remaining amount of $6 thousand, but only $5 thousand. However, the borrower must repay the lender all $6 thousand. Plus, there is a one-time fee and a bonus from the insurance company. In essence, this is how the bank earns on an interest-free car loan. The dealer actually sells the car on credit without interest and loses nothing in total profit. The fact is that it earns on increased sales volume. This is the official version. In the case of Renault, Nissan, Citroen, and Peugeot (these brands have their own financial programs), this is the most likely scheme.
Summing up, let's try to depict the earning scheme of the bank, the car seller, and the insurance company.
A CASCO policy when taking out such a loan often costs more than under a standard car loan. But it must be said that this does not apply to all credit programs. For example, at Renault's partner bank, in the recommended insurance company, the CASCO rate is 6.6% when taking out any loan. In some other organizations that offer "interest-free installments," it reaches 9.9%, and the one-time fee is up to 3.5%. It is indicative that for regular loans, several insurance companies are almost always offered to choose from, while for zero-interest loans, there are one or two. In fact, the borrower has no choice. All insurers recommended by the bank participate in the program under the same contracts. The same can be done with a notary. He will gladly share a portion of the borrower's money with the bank that directs the client to him.
If you decide to take an interest-free loan, keep in mind that, as with any other car purchase scheme, you need to have a not-so-small reserve not only for insurance and paperwork but also for the notary, etc.
The table shows all payments that will need to be made for insurance, loan processing, and car registration using the example of Renault Logan 1.2 for UAH 110,800 will cost:
UAH 1,980.00. — notary services (extracts from registers, registration of the car in the state register of encumbrances),
UAH 7,312.00. — CASCO policy (6.6% of the car's cost),
UAH 576.00. — civil liability insurance for owners of land vehicles
UAH 1,119.08. — 2.5% one-time fee
UAH 443.20. — 1% credit insurance
UAH 3,772.00. — vehicle registration (calculator for calculating registration costs).
Total: UAH 15,202.00*
*calculated for 1 year. When taking out a loan for two years, keep in mind that next year you will have to pay for insurance again
Despite the additional payments (although they are small), a zero-interest loan still remains the most advantageous offer on the market. Yes, insurance may be more expensive, but it is paid once a year. So this is a good option for people who have savings and lack a small portion to purchase a vehicle. In addition, it is a very convenient scheme when buying a car under the Trade-In program. Since the amount received for the previous car is most often equal to the initial payment for the new one, taking into account insurance. That's why a zero-interest loan suits them. Nevertheless, most clients consider the single biggest drawback of such loans to be the large down payment, which most often ranges from 50% to 60% of the car's cost.
