The Basic Elements In A Car Loan Agreement
The purpose of a car loan agreement is to bind two parties, the lender and the borrower, into a mutual agreement that will result in the settlement of the loan in a specified period of time. It also describes the responsibilities of each party that must be fulfilled for the duration of the car loan.
You may encounter these terms in one such agreement, and here’s what they mean.
- Agreement. The provision in the agreement must be in writing and must comply with the Republic Act No. 7394 or The Consumer Act of the Philippines. If the agreement is in direct violation of the national law, it will be considered null and void.
- Guarantor. A guarantor is a person who will substitute in your behalf in case you fail to subsequently pay for your loan. The debtor must also prove the guarantor’s financial capability.
- Deposit and Margin of Finance. Banks or in-house financing in the Philippines usually require a deposit fee between 10% and 20% of the vehicle’s total value. This means that most banks can finance as much as 80% to 90% of the car’s total value.
- Interest rate. The interest rate varies from vehicle to vehicle. It also differs from every financial institution. Your interest could either be fixed or variable depending on the agreed amount. In the Philippines, interest rates are usually fixed, this means the interest rate from the day you signed up for the car will never change all throughout the duration of the loan. Variable interest rate fluctuates depends on Prime Lending Rate (PLR).
- Insurance. Insurance is required by law for every newly purchased car. Banks or other car loan financing institutions often provide car insurance for new cars in the first to third years. They usually come free or for sale at a low price during the first three years of coverage.
- Penalty Fees. Financial institutions impose penalty fees on late payment. Worse, cars are usually repossessed within three consecutive months of non-payment.
Remember to keep a copy of the agreement in case problems arise in the future. Read through the agreement carefully to make sure that you are comfortable with the terms and conditions set in it before signing. One rule of thumb is to pay on time and avoid modifying the car during the length of the loan agreement so as not to void its warranty.
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