What is three-way financing?
Three-way financing, also known as balloon financing, describes motor vehicle financing in which the customer concludes a contract with a car dealer or an automobile bank. This type of financing is divided into three parts: an optional down payment, a monthly final payment and a final instalment. This is a mixture of installment credit and leasing, which means that the car only becomes the property of the customer after payment of the final installment. The reason for creating the financing was that the market offered the customer insufficient opportunities to use a car comparatively cheaply for a limited period of time.
The deposit of the three-way financing can be made quite differently, because there is the possibility to make a bank transfer, to pay cash, to use the credit card, or to give a used car in payment, which is then valued by the car dealer.
The installment payment is made monthly and can often be adjusted individually. The amount of the individual installments depends on the term of the loan and the amount of the down payment or final installment. You have to keep in mind that with low installments, only the interest or only a small amount of your loan is repaid in most cases, so that this is mainly considered sensible if you plan to return the car at the beginning of the three-way financing, instead of the final installment, or if you agree to hardly reimburse the loan.
The final instalment is paid at the end of the credit period and is usually quite high again, although there are banks that offer to regulate costs by means of the preceding instalments. In addition, it is very uncomplicated here, especially with the final installment of a new car, to take a further financing claim, which is again divided into installments and requires a final payment at the end of the term. This is a little more difficult for a used car, but it is possible to have such an extension covered by a contract if you know at the start of the purchase that you want to make use of it. In addition, follow-up financing always means a new loan, so that there is also a new interest rate. However, it is also possible to return the vehicle at the end of the instalment payments, whereby you must note that it must be in a contractually agreed condition. This condition is usually divided into a certain number of kilometres and the general condition, e.g. how worn the seats are, whether the paint is OK or whether the car has a strong smell of its own. If you are unable to do this, it is usually still possible to return the car, but you must expect the car dealer to charge you for these errors. You must also note that you do not purchase any property, but simply return the car to the dealer and therefore do not receive any money from him for the car. The practical thing about three-way financing, however, is the flexibility of the return, because if you have to move, for example, you can think longer and therefore perhaps better whether you ultimately want to keep the car or return it. Since this is unique in three-way financing, this type of loan is now so popular in Germany in particular that every second German chooses it. It is worth mentioning that the three-way financing offers much lower monthly rates compared to the normal installment credit. On the other hand, the total cost of the final payment is higher.