3-way financing: the car loan in 3 steps


What is 3-way funding?

What is 3-way funding?

3-way financing is one way of financing your new vehicle. You pay the purchase price in three steps. Futher reading at leaf-eu.org

  1. Step: deposit
  2. Step: Payment in installments with low monthly installments
  3. Step: final rate for the residual value of the car

Three-way funding has some specific features.

  • This includes that you can optionally make the down payment at many car dealers and banks, ie it is voluntary.
  • The installment payment phase often runs between 2 and 4 years. Often only low monthly installments have to be paid during this period.
  • Then the final rate is due, which corresponds to the current residual value of the car. The final rate is relatively high in many cases as it can make up more than 50% of the total purchase price. However, you also have the option of returning the car or financing the final installment with a follow-up loan.

Instead of 3-way financing, the terms loan with final installment or balloon financing are often used. The word balloon describes the high closing rate that can be inflated like a balloon.

How does 3-way financing work?


If you have decided against a cash purchase and for a car with 3-way financing, you must clarify with your car dealer or the bank whether you want to make a down payment and how high this should be. Then you determine the term of the installment payments. Now it is estimated how high the residual value of the car will be afterwards. To do this, you have to weigh how many kilometers you will drive until then. The dealer will use this data to calculate the key data for the three-way financing. The assumed residual value of the car corresponds to the closing rate.

Sample calculation for 3-way financing

Sample calculation for 3-way financing

The following example is intended to demonstrate the principle of three-way financing. You buy a new car for a total price of $ 30,000 and opt for a down payment of 10%, i.e. $ 3,000. You only want to pay the final installment in 3 years. Based on his previous experience and expected mileage, the dealer estimates the residual value at $ 17,000 at the end of the three-year period. This leaves $ 10,000 that you have to pay until the final installment is due.

Example of 3-way financing when buying a new car for $ 30,000

Purchase price $ 30,000
deposit $ 3,000
Completion rate $ 17,000
Financing over 3 years $ 10,000
Monthly installments, 4% interest rate $ 295

You pay monthly installments of $ 295 within 3 years at an interest rate of 4%.

What is the difference between 2-way and 3-way financing?

The difference between 2-way and 3-way financing is often asked. The term 2-way financing is used more colloquially and stands for the financing of a car with a down payment and a subsequent payment in installments until the entire purchase price has been paid.

What are the advantages of 3-way financing?

What are the advantages of 3-way financing?

Advantage 1: With a 3-way loan, you pay low monthly installments

Advantage 1: With a 3-way loan, you pay low monthly installments

The low monthly installments become clear when compared with a classic installment loan for car financing. If you take out a three-year installment loan for the purchase price of $ 30,000, you pay monthly installments of $ 885 at 4% interest. In the example of 3-way financing described above, you only pay monthly installments of $ 295.

Comparison of loan rates between installment loan and three-way financing

  Classic installment loan Balloon financing
deposit 0 $ $ 3,000
Monthly payments with a term of 3 years $ 871 $ 295
Closing rate 0 $ $ 17,000

Advantage 2: You can decide late whether to buy the car and therefore have a high degree of flexibility

The second big advantage is that you have years to decide whether you really want to buy the car or not. You only have to decide whether you want to own the car when the final installment is due. Then it is up to you whether you pay the final installment, start further financing for this amount or return the car.

Advantage 3: The down payment is often voluntary

In many cases, the car dealer lets you decide whether you want to make a down payment or not. A deposit is useful if you can afford the expense. This will reduce the amount to be financed. This is noticeable in lower monthly installments or in a lower final installment. If you do not have the money for a down payment at the time of buying the car, do without the down payment. However, you should be aware that you will have to pay higher installments or a higher completion rate.

Advantage 4: Buying a car is possible with a low start-up capital

The 3-way financing offers you the opportunity to buy a new vehicle with low start-up capital. If you decide against a down payment when buying a car, you only have to pay the relatively low monthly installments for the car in the first few years. However, the usual running costs such as insurance and maintenance are added.

Advantage 5: With 3-way financing, you can drive a new car every few years

You can drive the selected car to the final rate and then return it. Then you can choose a new car and finance it again with a 3-way loan and drive it to the final installment. If you repeat this process several times, you will have a new car every few years that you can drive at relatively low monthly rates.

Stiftung Warentest recommends that you do not rush to get financing from a car dealer. There may be better deals on a 3 way loan at your house bank or on the internet. Further information can be found in the Finanztest magazine from July 2018.

What are the disadvantages of 3-way financing?

There are also some disadvantages and risks with 3-way financing that you should definitely consider.

Disadvantage 1: You have to build up reserves for the high final rate of 3-way financing

When calculating your 3-way financing, you must pay attention to the high final rate. With a new car, the residual value of the car can still be around 50% of the new price after 3 or 4 years. In the case of a $ 30,000 car, that’s at least an order of magnitude of $ 15,000. If you plan to return the car then this is not a problem. However, if you want to pay for and buy the car at the end of the financing phase, you have to save the amount due. This means that you have to build up reserves in the amount of the final installment over several years. It is of course another thing if you expect a larger amount of money, for example when a savings contract expires. In this case, you do not have to save separately for the final installment.

Disadvantage 2: 3-way financing can be more expensive than a car or installment loan

Disadvantage 2: 3-way financing can be more expensive than a car or installment loan

In many cases, buyers cannot pay the high final installment in full and have to take out another loan if they want to buy the car. With follow-up financing, however, you can expect higher interest rates than before. This increases the total price of the car. In this case, the 3-way loan almost always becomes expensive as a simple installment loan.

For example, if you take out a car loan of $ 30,000, you will incur $ 1,849 interest at 4% interest and a 3-year term. Use 3-way financing and first take out a loan of $ 10,000, then there is a final installment of $ 17,000 at the end of the term.

3-way financing or car loan: which loan option is cheaper?

3-way financing or car loan: which loan option is cheaper?

  3 way financing Car loan
Purchase price $ 30,000 $ 30,000
deposit $ 3,000 0 $
Loan amount $ 10,000 $ 30,000
running time 3 years 3 years
interest rate 4% 4%
Monthly rate $ 295 $ 871
Interest costs $ 615 $ 1,849
Remaining debt after 3 years $ 17,000 0 $

If you take out another loan for the final installment, which bears interest at 5%, the balloon financing is $ 514 more expensive.

Refinancing of the final installment of $ 17,000

Refinancing of the final installment $ 17,000
running time 4 years
interest rate 5%
Monthly rate $ 413
Interest costs $ 1,747
Interest costs of 3-way financing $ 615
Total interest costs $ 2,363

You can find current offers for a car loan in our car loan comparison.

Disadvantage 3: The risk of a rapid loss in value of the car lies with the buyer

When returning the car, the dealer will check carefully whether there are any signs of damage or signs of excessive consumption. It can be scratches in the paint, dents in the body or damage in the interior. A few hundred or even a thousand dollars quickly come together, as experience with 3-way financing shows. If this is the case, you will have to pay for any damage to the car. So you take the risk if the car is worth less than you suspected when signing the contract. Pay close attention to the fine print when dealing with signs of wear or damage to the car.

The same applies if you have driven more kilometers than was stipulated in the contract. This leads to higher wear, the car loses value and you have to compensate the dealer.

Tip: The lender often also offers you additional residual debt insurance. With this insurance you cover the installments if you can no longer pay them due to illness or for other specified reasons. However, this insurance is only worthwhile for very large investments such as construction financing or in certain cases such as sole earners. It is not absolutely necessary for car financing.

What are the differences between 3-way financing and leasing?

With car leasing, you rent a car from the dealer who remains the owner. You pay a monthly rent for the right of use and the resulting loss of value of the car. Return the car at the end of the term. With 3-way financing, however, the car becomes your property with the payment of the final installment, you have paid it off and it is now yours.

Which is cheaper: 3-way financing or car leasing?

Which is cheaper: 3-way financing or car leasing?

Monthly car leasing rates are often lower, as the following example shows. You lease an Audi A 4 with a new price of $ 44,100 with a one-time special payment at the start of the leasing contract of over 20% and agree on an annual mileage of 10,000 km. In this case, you pay a monthly lease payment of $ 353 (according to the Audi Leasing Configurator, February 2020). On the other hand, if you want to buy the car with 3-way financing, you will receive monthly installments of $ 406.

Comparison of monthly rates for leasing and 3-way financing

Comparison of monthly rates for leasing and 3-way financing

  Car leasing 3 way financing
Factory price $ 44,100 $ 36,800
Down payment of 20% $ 8,900 $ 7,360
Closing rate 0 $ $ 15,440
Amount to be financed (3 years, 4% interest) 0 $ $ 14,000
Mileage per year 10,000 km 10,000 km
Monthly Rate $ 353 $ 406

In this case, the monthly installment payment is significantly lower for leasing. But when leasing, you are only the tenant of the car that you return in the end. With 3-way financing, you buy the car, it is yours after payment of the final installment. So you have a counter value for the higher expenses.

Is there 3-way financing for used cars too?

Is there 3-way financing for used cars too?

Three-way financing is also possible for a used car. However, the risk increases for you as a buyer the older a car, motorcycle or caravan is. On the one hand, the likelihood that old vehicles will lose more value over the years increases more than expected. On the other hand, it can break. If you no longer have it repaired because it is no longer worth it, you will still have to pay for a vehicle that you no longer drive.

Who is 3-way financing suitable for?

Three-way financing is worthwhile under certain circumstances, which we have summarized in the following checklist.

  • You can only pay low monthly installments
  • You are sure to be able to pay the final installment
  • You are undecided whether you want to buy the car
  • You are a careful driver and can avoid damage
  • You want to drive a different new car every few years

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