Unexpected expenses are never easy to deal with and when it comes to a car, those unexpected costs can be massive. Forfaiting is a convenient option if your car is worth more than the loan amount. What happens is that you choose an agreed value on your old car and borrow the money required for a new one in its place until the original depreciates enough that it becomes worth less than what you owe.
It is a very simple concept and the science behind it is perfectly sound. And it has been working for many people for many years now. However, if you are forking out a lump sum to obtain a new car and have no intention of selling that old one, then buying it off someone you know about for as little as possible, would be more sensible. Why? Because all purchases are based on the value of what is in your hand at the time.
What Is Forfaiting?
Forfaiting is the sale of a debt. Therefore, you will be selling the value of your debt to someone else who will then take over the payments for you. In return for doing this, they take a chunk of your loan sum – usually 10-15%. The reason this happens is because they are effectively taking it as an investment and therefore want a return on it.
Forfaiting is a common practice when it comes to car loan agreements and many people use this method to pay off a car contract in an easier and quicker way. They simply sell their debt as soon as they have processed the required paperwork and done a short period of payments – roughly between 50-100 days.
How Do You Profit?
Since you are essentially selling your debt, you need to see if there is any possible income from it. If you are selling a debt for less than what you paid for it, then you are only recouping the loss and have still lost a large amount of money in the process. However, if you can sell your debt for more than what you actually paid for it, then there is a lot to gain.
You bought a car last year that cost $8000 and financed it by getting an agreement with a bank to pay off $9000 over the course of three years. When the agreement ends, you need to sell your debt to pay off the remaining $2000. But you do not want to sell it for $2000 because that would only be an extra $1000 and possibly subtract from the sale figures. What you want to do is to sell it for a maximum profit and still have enough money left over to buy a new one.
The problem is that the price of cars has gone up in recent years and so has the value of your debt. The current price of your car is $10,000 and that means you can sell the remaining debt for $13,500. Although there are considerable gains to be made by selling the debt at its full value, there is also a risk in doing so because you will not be able to buy a new car with that amount of money.
How Forfaiting Works
When you sign on the dotted line for your car loan, you are effectively giving the bank or finance company ownership of that vehicle. So, when your debt is sold to another company, then technically, that company is free to do whatever it wants with that vehicle.
That means selling it for parts if needed and even breaking it down into its component parts and selling them individually. This is common practice and we have had a lot of customers recently who have sold their cars to scrap yards because they had no way of repaying their loans. The real reason they did this was because they were unable to sell their debt for the full amount.
Forfaiting can be a very efficient way of paying off car loan agreements without incurring too much interest. However, if you are selling your debt to a company who needs it to pay off a car they already own, then that is not very efficient. In fact, it is a scam.
We recommend buying the car that you want and selling your debt to someone else who is selling it as an investment. This will ensure that you still get the maximum amount of money when selling it and also that you can easily buy a new one whenever you want.
Advantages of Forfaiting
- The main advantage of forfaiting is that you can raise money whenever you need it. This is great if your old car has no trade-in value and you have to start from scratch with a new car.
- You avoid the time-consuming process of applying for a loan and being turned down because your credit record is not good enough or not being accepted by the bank because your income does not match the loan.
- You can use the money that you have borrowed from a bank or finance company to buy something else in addition to your car. For example, if you borrow $8000 for your car and you get $9000 from selling your debt, then you can use another $2000 as your deposit for a house or you can use that money to pay off some other debts.
- You avoid paying interest on the full amount of money and instead only repay the amount that is agreed with a set period (usually 20-50 days).
- You can sell your debt to someone else who is willing to pay a bit more than the original amount that you paid for it. This way, only the seller loses out and not you.
- Your credit rating will not be affected because it is your debt that is being sold, not you. As far as your credit rating goes, it is as if you have never taken out the car loan in the first place.
Disadvantages of Forfaiting
- The main disadvantage is that selling your debt is a risky business. For example, if you sell your debt for $20,000 and want to pay off your car with that money, then chances are that you will not be able to get a loan big enough to buy a new one.
- The company who buys your debt may not pay you the full amount because they are looking to make gains on their investment (like an investment bank). Therefore, you will be getting less than the original amount.
- The company who buys your debt is free to do what they want with your car, including selling it for parts or even breaking it down into its components and selling them individually. This means that you might not get your car back at the end of the period and have to start over again.
- Your credit rating can be affected if you fail to pay off a loan on time or end up with several loans in default.