Why Is Car Loan Cheaper?
2 Answers
Paying in full is actually cheaper than taking a loan when buying a car. Below are detailed introductions to both payment methods: 1. Paying in full: (1) Advantages: Full payment means settling the car price at once, avoiding many fees like handling charges and interest. The process is fast with short approval time, and you can often pick up the car the same day. For insurance purchases, you won’t be bound by loan contract restrictions. (2) Disadvantages: Requires a large sum of money upfront, which can be inconvenient for cash flow needs, and the purchased vehicle immediately enters a depreciation cycle. 2. Car loan: (1) Advantages: No need for a large upfront payment—only 20% down payment is required, with some lenders even offering "zero down payment." The remaining funds can be used for investments to generate more wealth. Additionally, a car loan allows early use of the vehicle, providing convenience. (2) Disadvantages: Car loans come with strict conditions, cumbersome approval processes, and additional costs like interest and handling fees. They also increase the risk of falling into loan traps, such as bundled sales or mandatory insurance purchases from the dealership during the loan period.
From a banking friend, I learned that car loans are cheaper mainly because banks are very shrewd with their calculations. Their cost of funds is low, as the interest they pay to peers or depositors isn't high, and they can earn a spread by lending the money out with a slight markup. Moreover, cars have collateral value, making the risk much lower than unsecured loans, with a lower bad debt rate, so banks dare to lower interest rates. Additionally, car loan terms are short, with principal recovered in just one or two years, ensuring quick capital turnover. This allows banks to profit from small margins but high volume, making it more cost-effective. On top of that, banks compete with auto finance companies for customers, occasionally offering interest subsidy promotions, which overall makes consumers feel it's a good deal. Of course, banks also prioritize long-term customer retention, such as pushing credit cards or wealth management products, which generate more profit in the long run.
