When a car is bought, customers are often offered auto financing by their dealer. These offers are usually the well-known three-way financing (Drei-Wege-Finanzierung, a German balloon-payment financing model).

This is usually more expensive, however, than installment loans from a bank.
There are various options for financing a car. These include

auto financing
  • a lease agreement,
  • an installment loan and
  • a three-way financing.

The installment loan for auto financing

Car financing is quite widespread, especially in Germany. According to a GfK study, in 2018 45 percent of all new cars bought by private buyers were paid for with an installment loan. For used cars it was still 32 percent. So buying a car is the most common reason to take out an installment loan from a bank. In fact, 59 percent of installment loans are used for car financing. On average, buyers finance their new car with 18,200 euros over a total of 48 months, and used cars with about 12,000 euros over an average of 51 months. The figures make clear that financing a car with a loan has long been no exception.

The three-way financing for auto financing

Because of its costs and the possible payment problems at the end, a three-way financing is rarely a sufficient option. One reason is that the customer absolutely needs a car but cannot currently afford the payments of a conventional loan. Keep in mind that the customer must have the money at the end of the financing. This type of financing can also be an option if customers know they can pay the final installment.
Three-way financing is therefore just one way to finance the new vehicle. Customers pay the purchase price in three steps. The first step is the down payment, the second step is the installment payments with low monthly amounts, and in the third step the final installment for the car's residual value falls due.

auto financing

A three-way financing therefore has important specific features. These include that customers can make the down payment at car dealers optionally, so it is voluntary. The installment payments often run between 2 and 4 years. In most cases only low monthly installments have to be paid during that period.
Then the final installment comes due, which corresponds to the car's residual value. This final installment is quite high in most cases, because it can amount to more than 50 percent of the purchase price. However, customers also have the option of returning the car or financing the final installment through a separate follow-up loan.

The classic car loan: buying the car in installments

A car loan for financing a car is always a purpose-bound loan, and thus a loan that is repaid monthly in set installments. For auto financing, many banks offer better terms than for a conventional installment loan. The main reason is the greater security: during the term, the borrower must pledge the vehicle registration certificate (Zulassungsbescheinigung, formerly Fahrzeugbrief) to their bank as collateral. During this time the car also cannot be sold. This is prevented by the blocking notation until the installment loan is paid off.