What happens when you default on your car loan’s monthly payments?

Make sure you can afford a car if you buy
by Carlo Chungunco | Jan 28, 2019
PHOTO: Dinzo Tabamo

You see them all over your Facebook feed—ads for financing of new cars or motorcycles specifically targeted at you. These adds boast zero down payment or minimal monthly payments, making it seem like it’s now easier than ever to fulfill your dream of owning your own vehicle. In fact, some car brands even make it almost impossible for you to get on the waiting list for a hotly anticipated model unless you finance the vehicle from their own in-house finance company.

Why the push for financing? A lot of us have the misconception that these deals are done for the customer’s benefit. But the real reason is that dealers derive more income from financing plans. Unlike with outright cash purchases, wherein the dealer gets only a small commission from the distributor, if a salesperson gets you to finance a car, the dealer’s commission from the financing entity is a lot higher.

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Let’s say you’ve gone for car financing and are now making monthly payments. Now what? Well, you might’ve already missed doing the most important thing of all: reading the contract. While the law provides for certain protections for buyers, most of the fine print in your contract will dictate the majority of your rights under your relationship with your financing company and your ownership experience.

When you check your Certificate of Registration, you may notice that the word “encumbered” appears in it, meaning that your loan is secured under a chattel mortgage. A chattel mortgage is a form of loan security whereby your loan amount is covered by the movable itself (in this case, the vehicle you purchased). In case of your failure to pay, your car can then be taken by the financing company and sold to cover your debt.

What happens if you do miss a monthly payment? This depends on the contract you’ve signed. It may state things such as the imposition of a penalty interest (on top of your financing interest as a form of damages), or even that you will be deemed in delay upon missing a payment without need for demand. These things are the reason it is imperative to read what you’re signing. Don’t let the promise of a new car delivered ASAP distract you from going over this document with a fine-tooth comb.

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There was a problem early on when unscrupulous sellers would take the vehicle in question (repossession) and sell it at public auction, then go after the buyer for the deficiency over the unpaid part of the contract. Thankfully, the Recto Law was passed, which successfully amended the Civil Code to protect buyers of vehicles by installment.

The law amended Articles 1484-1486 of the Civil Code and applies to financing transactions involving movables (in this case, cars or bikes). It provides that when the buyer fails to pay his installments, the seller can opt for any of three possible remedies:

1) Specific performance

Specific performance is when the seller can demand payment should the buyer fail to pay any installment. In this case, the seller will have to go to court to ask that you pay what you owe or what you have failed to pay when you defaulted on your obligation.

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2. Rescission

Rescission is available if the buyer fails to pay two or more installments. It is when the seller cancels the sale and can demand return of the vehicle. While this doesn’t sound like the worst option (considering that you cannot afford to pay already), note that your contract may state that all your previous installments paid are forfeited in favor of the seller (so again, read your contract).

3. Foreclosure

Lastly, and this is the most common, the seller can choose to foreclose on the chattel mortgage. It involves taking the vehicle from your possession and selling it at public auction to cover the remnants of your debt.

While all this sounds horrible, the law at least provides that they are alternative—not cumulative—remedies. This means that once the seller chooses one of the three courses of action, it cannot anymore (generally) go for other remedies against you.

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In fact, the law states that if the seller forecloses on the chattel mortgage, it can then take no further action against the buyer. Any stipulation against such is considered void and not written into the contract.

Taking possession of your vehicle can be done in various ways, from private repossession officers to the court sheriff paying you a visit. The mere fact that a vehicle is easy to run away with means that the law provides for a quick way for them to secure the property, and that is generally by taking it and putting it under the control of the court.

At the end of the day, make sure that before you take that delightfully tempting zero-down-payment offer, you are aware of your rights not just under the contract, but also under the Civil Code. Otherwise, you might find yourself knee-deep in debt and without a car or a bike to answer for it.

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PHOTO: Dinzo Tabamo
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