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What is residual debt?

What is residual debt?

Residual debt is a concept that is mainly associated with car loans. The premise is that after the end of the amortization period, you sell the car back to the dealer at the current market value - then called the residual value. A loan with residual debt can be both positive and negative for you as a borrower. Below we go through everything you need to know!

Before you decide to borrow for a car purchase, it can be worthwhile to compare the offers of different lenders. At Advisa you compare personal loans up to SEK 600,000 from 40 lenders. The comparison is free and only one credit report is taken.


The difference between a private loan and a classic car loan

The price range for cars, motorcycles, and boats is certainly large, but many still need to take out a loan to finance the purchase, especially if the object is new.

What mainly distinguishes a traditional vehicle loan from, for example, a private loan is that the vehicle can be taken as collateral, which can mean a more favorable interest rate. In most cases, it is required that you can put down a cash deposit of 20% for this type of loan and that the vehicle stands as collateral for the loan. For a private loan, there is no requirement for a deposit or collateral. 

Car loans can either have a regular arrangement where you amortize the entire loan amount over time or be a loan with so-called residual debt. What is a Cab Loan?

Residual value – Calculation of the vehicle's value

Cars depreciate in value with use. For example, if you buy a new car for SEK 200,000, two years later it may have decreased in value by SEK 100,000. Car dealers often offer loans with residual debt, which is based on an estimate of the car's value on the day the loan expires. This is also called the residual value.

What are the advantages and disadvantages of a loan with residual debt?

Unlike other loans, the premise is that you only repay and pay interest on an agreed part of the total purchase price. You can then choose to pay off the entire loan by having the car dealer take the car back, buy it off with equity or switch to a new car and start a new installment.

The big advantage of residual debt is that the monthly repayments and the interest on the part of the loan that is paid off will be smaller. It is of course good from a short-term perspective, as you get to drive a well-maintained and well-insured car at a low cost for a given period. However, there are also risks with having a residual debt. 


How is the residual value calculated?

The residual value of the vehicle is calculated from the date of purchase. Although the estimation is based on a number of different parameters, it is ultimately nothing more than an educated guess as to what the future value might be. Changes in the economy or market supply may affect this. But above all, the resale value depends on how well you took care of the car. 

For the calculation to be correct, there must not be too much wear and tear on the car on the day the term of the loan expires, as this usually means a substantial reduction in value. Any difference you as the borrower must pay, which means that the loan was, after all, more expensive than you first thought. If your finances have also deteriorated at the time, a residual debt that you can't settle is the last thing you need.

Why do car dealers offer loans with residual debt?

The car dealer industry is highly competitive and many buyers view loans with residual debt very positively. If the car is only looked after well, it can even have a higher residual value than estimated. The difference can then be added to the cash deposit on a new, fresh car. 

For the seller, there are also other advantages to the arrangement. The loan is completely tied to the object, ie the car, so the buyer cannot sell it to pay off the debt. If that were the case, the whole concept would become pointless from the car dealer's perspective. The point of loans with residual debt is to create additional sales, as a trade-in for a new car is the most common scenario.

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