Understanding car loans

You should ascertain what kind of car you need before you even think about shelling out any money. You don’t want to part with your hard-earned money for 48 months to pay for a car that you don’t even like.

You should ascertain what kind of car you need before you even think about shelling out any money. You don’t want to part with your hard-earned money for 48 months to pay for a car that you don’t even like.

We look at the process of having a new car in your garage for the price of a high-end television

When business and motoring publications the length and breadth of the land talk about the ever-increasing car sales in the Philippines, this is often accompanied by phrases like “buoyed by accessible financing schemes” or “a result of low interest rates.”

It’s fundamental economics: if you want to promote consumption, drop the interest rates so that more people would be less willing to save their money (look at how little you can earn in a savings account nowadays) and more willing to spend and take out loans to buy everything from cars to mansions.

But for many people, having “utang” is a scary proposition, especially in what is considered as the second-largest investment that one would make in his or her lifetime. Fast Times takes a look at what you need to know when you take out an auto loan.

1. Know what car you need.
As Fast Times wrote in a previous supplement, you should ascertain what kind of car you need before you even think about shelling out any money. Consider the kind of use you’ll have for that vehicle, especially over the period that you’ll be paying off the loan. The last thing you’d want is to part with some of your hard-earned money for 48 agonizing months to pay for a car that you don’t even like.

2. Know the terms and do the math.
The finance industry is renowned for having so much superfluous and esoteric gobbledegook that it can drive ordinary people mad (and, worse still, make them pay more than they should). To keep things simple, every car loan has four major components that you should be aware of: downpayment, amount financed, amortization and interest.

Almost all car loans require you to put in a downpayment, which is effectively your share in the total cost of the car. For instance, you want to buy a P630,000 subcompact sedan. A typical minimum required downpayment would be 20 percent of the car’s cost, which amounts to P126,000 of your own money.

This brings us to the amount financed, which is the money you’ll be borrowing to pay the balance after putting in the downpayment. Keeping with aforementioned figures, the amount financed after your 20 percent downpayment would be P504,000.

Of course, the entity that loaned you that half a million pesos would like you to pay it back. To make it easy on you, loan companies would ask you to pay back that amount over a long period of time, divided into months (typically 12 to 60 months). Those monthly payments are called amortization.

It is also in the amortization where interest (and interest rates) come in. Interest is effectively the amount added on top of the amount financed as the cost of making the lending company wait for you pay it back. To illustrate this concept, if you were to pay back P504,000 over 48 months without any interest, it would only cost P10,500 a month.

But using the online auto-loan calculator of a prominent bank, paying the same amount financed for the same period results in an amortization of P12,729.00. This means that the bank is charging you P2,229 a month in interest, which would total P106,992 in interest over the amount you originally borrowed.

Indeed, it is highly recommended that when you take out an auto loan, you should put up as high a downpayment as you can and avail as short an amortization period as you can afford so that you won’t be burdened with paying so much in interest.

3. Prove your worth.
In a perfect world, banks would lend you money even if you had no chance in hell of paying them back. But as many left-leaning individuals would say, a capitalist economy is not a perfect world and lending companies will certainly check if you can pay them back. (Remember the mortgage debacle that led to the 2008 World Financial Crisis?)

Although companies that issue loans may not have exactly the same requirements, the most important thing that you have to prove is that you have the financial capacity to not only pay the amortization, but also to pay it in full and on time. This typically entails giving lending agencies documents like certificates of employment and income tax returns as proof of your income. Other things like a high credit rating, financial statements, bank certificates and a stellar investment portfolio could be big plus points for you when you negotiate the terms of your loan.

4. Pit lending companies against each other.
And that last part leads to the fourth tip: negotiate, negotiate, negotiate. With auto loans, it’s really a race to the bottom, such that you want to keep the amortization and the interest as low as possible. Also consider the freebies that come along with an auto loan, such as free car insurance and registration.

Don’t be afraid to pit lending companies against each other so that you get the best deal. As a general rule, in-house financing (auto loans provided by car dealerships) tends to rain freebies on you when you avail it, but often at the cost of far higher amortization and interest than the less freebie-inclined bank financing (there’s no such thing as a free lunch in economics, remember?)

Happy hunting and happy buying.


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