First of all: what is the difference between loan or financing?
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Both the financing and the loan are a contract between you and a bank, where you receive a value now and promise to pay the bank in the future, plus interest. The number of installments and interest are combined shortly before you sign the agreement.
The difference is:
- loan: the amount obtained has no specific destination (can be used as you wish).
- financing: the amount obtained has a specific destination (usually the purchase of a property, car, motorcycle, truck, boat, tractor…).
As the financing has a definite purpose (buying a property or vehicle), this greatly reduces the risk of the bank, which in the worst case, will have the good that you bought as collateral in case of non-payment. In addition, by knowing the destination of your money, it will be more certain about your consumption profile (and thus you can better analyze your ability to pay debts).
With this, the interest for you decreases a lot in financing! That way, almost always, financing is the best option (because it has lower interest rates for you).
What can I do with a loan?
As the loan service has no specific destination, it can serve anything like (interest is paid by the service):
- Pay the credit card
- Pay the overdraft
- Remove debts
- Buying goods
And the funding?
The main difference is the need to present information about the product or service to serve as a guarantee for the institution.
Okay, but after all, how do you decide which one is best?
The decision is simple: interest rate!
This is the main information you have to check to make your decision.
According to data from July 2016 of the credit report of the Central Bank of Brazil, the average interest rates for auto financing and payroll loan were:
Acquisition of Vehicles (Financing) : 26%
Paycheck-deductible personal loans for civil servants : 27.3%
These are average values. That is, as they vary and are very close, this does not guarantee that financing will always be cheaper than payroll-deductible loans.
Then that’s it:
- Check out the Interest Rate and Total Effective Cost among the options you have.
- Choose the smaller one!
By having smaller interest rates and always being related to large amounts, the financing is more bureaucratic and time consuming. The analysis is more detailed and the payment term is always great, with years to come. Besides the money does not go directly to you, the taker, but to the company of the good that is being bought. When buying a car, the money goes straight to the dealership of the vehicle.
On the other hand, the loans do not have as much bureaucracy so they are quicker to leave. The analysis happens in a simplified way and because these are smaller amounts the payment term tends to be smaller, a matter of a few months. Besides the money go directly into your hands for you to use as you need.
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More broadly and generally, the loans would be for more immediate situations like paying a debt, renovating your house or doing maintenance in the car. While financing for more expensive things and more durable goods like a house and a car.
However, it is not a rule and every case needs to be studied. The fees need to be compared to choose the best deal available, it is necessary to assess the urgency and need of the good that money will be spent. In addition, to carry out a self-assessment and check if the debt does not greatly affect the monthly budget, if what you have and earn is sufficient to pay the installments and if after a few months it will be possible to continue paying. One of the things to be analyzed is the CET.
What is CET?
Total Effective Cost is the total amount paid at the end of a loan or financing. Interest rates and plot values should be analyzed, but the CET becomes more important because it includes all fees charged. These fees are in addition to interest rates, charges, insurance, taxes, taxes, notary fees, commissions and other expenses paid by the policyholder.
What is it for?
With CET it is possible to analyze which loan or financing is most advantageous. For having an overview and informing what will be the total amount to be paid at the end of the operation. Analyzing only interest rates is dangerous because the other fees included will not go into the account. With this, it is possible to find a proposal with a higher interest rate, but more advantageous when comparing the Total Effective Cost because it does not have so many taxes behind.
All companies are required to provide the value of CET in the contract. To compare offers between banks always simulate with the same value and payment term, each company has its rules and tariffs so the values vary from one to another.
Now that the differences have all been clarified and you already know what needs to be analyzed to choose the best loan or financing, the time is to study the situation and find the best opportunities for you available in the market.
If you want to buy a vehicle, financing is almost always cheaper, and a good conversation at the dealership can help you make these rates even cheaper.
But anyhow, never fail to compare these four cheap credit options:
- personal loan with property in guarantee (mortgage)
- personal loan with vehicle under guarantee (vehicle refinancing)
- payroll loan