Car Loan Options In The Philippines

Car Loan Options In The Philippines

While forking out a huge chunk of cash is the cheapest way to pay for a car, it’s also the payment method that not everyone could easily afford. Most car purchases are done through installments (car financing) offered by banks or a car dealer, spreading the payment to as long as 6 years. Though at the end of the payment term, car buyers end up paying for more, the payment is easier to manage.

There are two types of car financing – dealership and bank loan. These two are both convenient ways to own a car without putting a big dent in your cash flow. Depending on your financial capacity, one can be more beneficial than the other.

In-house or dealership financing

This is the financing option best for people who hasn’t built a strong relationship with their banks. It’s practically easier to apply for than a bank car loan, however it does have its own sets of pros and cons that you need to weigh before your consider getting a car from one.

Pros

  1. It presents a certain level of convenience to car shoppers as most of the time your financial information will be handled first. The salesperson you will be working with will know what your budget is exactly before showing you a single car.
  1. Even if your budget can get you a passable used car, in-house financing can offer you a newer, more comfortable, and better looking car that’s still within your budget.
  1. They are willing to work with people who cannot pass bank car loan qualifications, as long as the car buyer is able to provide the down payment for the car and good enough income documents.
  1. If you are looking to drive out of a car dealership for as little as 10% down payment and take as long as 72 months to pay off the balance, this is the best financing option for you.

Cons

  1. The longer the payment term, the lower the down payment, the higher the interest rate.
  1. Due to the leniency of their approval process, their interest rates are usually higher than banks.

Pro tips

  1. Even after you’ve made up your mind on which vehicle you’ll get, it still pays to go dealer-hopping for the best financing packages and deals among different dealerships. Aside from having different vehicles to offer, their interest rates, payment terms, and overall payment package may differ.
  1. There’s no such thing as free chattel mortgage or comprehensive insurance. Any deals offering these will probably have higher interest rates per year. In effect, the cost of the “free” items is just being hidden elsewhere to make the deal look more attractive.
  1. Forgo additional rustproofing offers. Cars these days are manufactured with a high degree of corrosion resistance, they don’t rust unduly without being affected by an external factor. Almost all modern cars don’t rustproofing.
  1. Forking out more cash for your down payment will minimize the amount that needs financing. This means, you’ll be getting a lower loan amount, equating to a lower number of interest payments you have to make. The longer the loan duration, the more interest you’ll need to pay as well.

Bank car loan

In-bank financing for your car purchase is quite straight forward but also more complicated. There will be no middleman (dealer) involved, thus you have to liaise with your car dealer and bank by yourself. The good thing about this though is that it eliminates additional commission charged on top of your purchase, so interest rates will be lower than dealership financing.  However, banks are commonly known for their strict requirements that not everyone could meet. Only people who has a good relationship with their bank or those who have a good credit history to show can easily apply for one.

While a car loan from a bank is the best financing option for anyone, it’s not with any challenges that may or may not make a car purchase easy for you.

Pros

  1. They are established lenders and are not likely to pull some of the tricks that ‘cheap money shops’ and other third parties sometimes engage in.
  1. In addition to a bank car loan, banks can also help with mortgages and other forms of loans. Some banks can apply a home equity loan or home equity line of credit to an auto loan.
  1. Some banks will allow you to get pre-approved for a car loan, if you’ve been using their service for a long time and have a good record with them.
  1. Utilizing the bank’s other products such as their credit card or other accounts can get you discounts on interest rates, as well.
  1. Lower interest rates than car dealership financing.

Cons

  1. Rates are often non-negotiable, especially the down payment, and this can vary from bank to bank.
  1. Stricter Requirements.  Doing business with your bank for a long time isn’t even enough to guarantee you an approval for a car loan. Your credit record must also be stellar in order to easily qualify. Applying for a car loan in a bank that you haven’t been engaged with is even harder. Banks have a set of specific conditions and documents required for approval. You’re likely to qualify for an auto loan if you fit these criteria:
  • You are an employed Filipino individual less than 70 years old by the time the loan matures;
  • You have a monthly income of ₱30,000 or more;
  • You’re buying either a brand-new or used car that’s no older than five years; and
  • You only need to loan 80% of the total amount needed to purchase the vehicle.
  1. Since a bank will just provide financing outside your deal with a car dealer, you will have to do all the paperwork yourself and communicate with both to process your car purchase.

Sample computation

20% down payment30% down payment40% down payment
Down payment₱243,600₱365,400₱487,200
Vehicle price₱1,218,000₱1,218,000₱1,218,000
Payment term60 months (5 years)60 months (5 years)60 months (5 years)
Annual interest rate4.8%4.8%

4.8%
Interest rate for 60 months24%24%24%
Monthly repayment₱20,137.6₱17,620₱15,103
Total amount of monthly repayment₱1,208,256₱1,057,224₱906,192
Total interest over loan period₱233,856₱204,624₱175,395

Whichever payment route you choose to take, at the end of the day it will boil down to who can give your cash flow a bigger room to breathe. Choose one that offers the resources which can meet your needs but is still within your financial capacity. Your decision shouldn’t be solely based on the overall interest rates, but rather on which one is more suitable to your financial standing and capacity.

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