Tip Sheet

Car ownership 101: What's the best financing option for you when buying a vehicle?

Allow us to explain the choices

Car financing

Congratulations! You're now ready for that next step in welcoming the newest baby of the family--your four-wheeled baby. And that next step is trading the bunch of bills you've set aside.

You're swapping cold, hard cash for a cool car. And that is the best way to pay for it as with any purchase: straight up in one go. No mortgage fees, no interest payments, no possibility of missing a monthly payment and losing your car should you suddenly lose your source of income.

While forking out a huge chunk in one payment is cause for cash separation anxiety, you'll quickly get over it as soon as you're on the road. It's also the payment method that requires the least amount of money for your purchase.

But what if you don't have enough cash? That's when you can opt to finance it. Before you do, however, note that you will end up paying more at the end of the loan period if you decide to go this route.

Financing is convenient, and has the advantage of allowing you to acquire a new car and pay for it over a period of time without putting a big dent in your cash flow. But the reality is that not everyone is qualified for one.

You'll need to be able to make the monthly payments and have a minimum amount of monthly income to qualify for an auto financing package. Moreover, you need cash up front for the down payment, chattel mortgage fees, and insurance costs, which we'll discuss in a separate article.

Now, how much money for down payment? It depends on your chosen vehicle and where you'll get financing. And you may get financing from either a dealership or a bank.

Dealership financing

In certain cases, it is possible for you to drive out of a dealership with a car for as little as 10% down payment and take as long as 72 months to pay off the balance. The more common practice is 20% down payment and 60 months to pay.

Ideally, you want to pay the most amount of money for down payment to minimize the amount that you'll need to finance. A lower loan amount equals a lower total in interest payments you have to make, whatever the interest rate. Knowing that, you'll also want to pay it off in the shortest amount of time that your monthly income will allow you to. The longer the loan duration, the more interest you'll need to pay as well.

The most expedient way to purchase a car through financing is to ask the available payment options at the dealership. They'll be more attentive to your requirements if you decide to go with the one-stop shopping route.

Note that 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. Some tips:

1. Ask as many questions about the deals being offered to you.

2. Bring your own calculator, pen and paper to countercheck the computations. Crunch your own numbers. You may just discover that what may look like a good deal actually isn't.

3. A quick way to figure out how much interest you'll be paying is to perform the following:

* Get the total amount of your payments (monthly amortization multiplied by the number of months to pay) and add the down payment to it.

Vehicle price = P1,218,000
Down payment = P609,000
Monthly amortization = P15,000
Loan term = 60 months (5 years)

Total amount of payment = (P15,000 x 60) + P609,000
Total amount of payment = P1,509,000

* Divide that total by the selling price of the car.

P1,509,000 ÷ P1,218,000 = 1.24

* Get the last two digits and then multiply them by 100 to get a percentage. That's your total interest over the loan duration. In our example below, it's 24% over 60 months or five years.

0.24 x 100  = 24%

* To get your interest per year, divide that by the number of years you'll be paying off the loan. The result will roughly be your interest per year.

24% ÷ 5 years = 4.8% per year

4. Keep the chattel mortgage as a separate entry because that's usually fixed within a certain range pending your loan amount. And remember: There's no such thing as free chattel mortgage or comprehensive insurance. Any deals offering such 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.

5. Decide which deal works for your individual needs best.

6. Don't forget to forgo the dealership's offer for additional rustproofing. Almost all modern cars don't need it. No car these days will be manufactured without a high degree of corrosion resistance, nor will it unduly rust without being affected by an external factor.

7. More often than not, in-house financing at the dealership will cost you more than applying for your own car loan at a bank.

Bank financing

Requiring a bit more of legwork, an auto loan at a bank will usually get you lower interest rates and, thus, save you some money on interest payments. An interest payment of 3% per year may not sound like much, but when the principal is several hundred thousands, every little bit you can do to reduce your total cost is more money that you don't have to spend.

You'll need to go to your particular bank for the specific conditions and documents required for approval. You're likely to qualify for an auto loan if you fit these criteria:

1. You are an employed Filipino individual less than 70 years old by the time the loan matures;

2. You have a monthly income of P30,000 or more;

3. You're buying either a brand-new or used car that's no older than five years; and

4. You only need to loan 80% of the total amount needed to purchase the vehicle.

Whichever payment route you choose to take will be up to you, your financial situation, and individual needs. Include operating (fuel) and maintenance costs into your monthly budget.

Happy car-shopping!

Artwork by Audrey Faye Lacsamana

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