Car Loans: The Full Guide

What are Car Loans?

A Car Loan or an Auto Loan is a type of loan where a person borrows money (typically from their local bank) to purchase a motor vehicle for personal or business needs. The vehicle serves as collateral until the loan is completely paid, usually within a period of 3 to 5 years. 

Auto Loans are considered simple interest loans, where the borrower typically pays a fixed monthly installment for the principal amount borrowed plus the interest on the loan. 

The car loan rates may vary depending on where the automobile loan is applied. Therefore, if you are looking for a car loan in the Philippines with the lowest interest rates, it will help to shop around and look for a car financing that fits best for you and what you can afford. 

Types of Auto Loans

Car Loans in the Philippines are not just limited to purposes of personal use. Businesses also have the option to apply for car financing to expand their business operations. 

A typical auto loan in the Philippines provides financing for these types of vehicles:

• Passenger Cars
• Asian Utility Vehicles (AUVs)
• Vans
• Sports Utility Vehicles (SUVs)
• Light Commercial Vehicles (LCVs)
• Big Bike
• Trucks

With these types of vehicles in mind, when a person applies for a car loan, they can also decide whether they prefer to apply for a secured or non-secured loan. The key differences between the two are the following:

Secured Car Loan

A secured car loan requires collateral, and in this case, the collateral is the vehicle you have taken out. Some cases that Filipinos are familiar with is when a bank or a lending company takes the car when the borrower is not up to date in paying off the monthly payments. For personal car loans, this practice is widely applied. 

Unsecured Car Loan

Unlike a secured car loan, there is no need for collateral for an unsecured loan. However, a bank or a lending company will charge higher interest on the loan. The caveat here is that the borrower should have an excellent credit standing. 

What To Look For

Buying a car has costs that do not end with the monthly amortizations you need to pay for. Even then, you have to check and compare the down payment, interest rates and other offers that banks and lending companies are willing to offer. Although some offer free car insurance in the first year and other freebies, consider the following when seeking a car loan:

Required Down Payment

The down payment required on an auto loan typically depends on whether you buy a brand new or second-hand vehicle. In most cases, brand new vehicles require a minimum down payment of 20%, while a second-hand car requires a minimum down payment of 30%. Other times, car dealerships have promotions and sell vehicles at 0% down payment.

Monthly Amortizations and Payments

Monthly payments on auto loans will be comparatively higher than renting or leasing a car. However, the concept of leasing is not that popular in the Philippines because there are vehicles that offer more reasonable terms of payment that can almost compare to leasing a car. 

But before going ahead with a car loan, one must first consider the use of the car, the monthly payment on the loan, and consequently, compare it to what will be paid if the leasing option is selected. 

Maintenance Costs

A person is free from any maintenance costs (except fuel) if they are just leasing a car because that falls on the car rental company. But vehicle owners will face maintenance costs attached to owning a car. A few of these maintenance costs include the following:

• Fuel
• Car Wash
• Change Oil
• Tires

These costs will increase or decrease depending on how often the vehicle is used and the distance the car travels daily. 

Trade-in

Car trade-in is a practice that most people do when they wish to upgrade their existing vehicle to a newer one or look for a quick sale. There are benefits to trading on, but there are disadvantages as well – one of them is getting a lower value of the car when done through the car dealership rather than personally doing it yourself. 

End Cost

Admittedly, some people tend to focus on paying monthly rather than looking at the whole picture. For example, that’s how car dealerships and banks promote cars these days – low monthly payments or zero down payments. However, one must be wise enough to compare the principal amount plus the interest and other incidental fees. Based on this, a person will be able to identify for sure which bank or lending company to go for, the maximum down payment they can pay, and the term of loan they will be willing to commit to. 

Key Factors to Consider

Before you decide which vehicle to buy and whether or not to get financing, some factors need to be considered and carefully reviewed. Among others, here are a few of them:

Annual Percentage Rate (APR) 

The APR is critical when considering which loan to go for and the terms that will work best for you, depending on your budget. The interest will undeniably be lower for loan terms that are only for 12 months than loan terms that are 60 months, but the savings matter. 

For an average car loan in the Philippines, the maximum APR for a term with 3 years is 17.33%, and the maximum APR for a term of 5 years is 31%. 

Loan Term

Loan terms on auto loans depend on whether you buy a brand new or a second-hand vehicle. The maximum loan term you can choose for a brand new car is 5 to 7 years and 3 to 4 years for a second-hand vehicle. 

Downpayment

Down payments also depend upon the vehicle you are planning to take. Brand new cars require a minimum downpayment of 20% and 30% for second-hand vehicles.

Other Fees and Penalties

There is always a penalty for late payments like in any other loan. So, of course, borrowers must strive to avoid this to avoid the bank/lending company taking the vehicle from the owner. 

Leasing vs. Owning a Car

The decision to buy or lease a car will depend on some personal reasons. Many factors need to be considered, and eventually, the decision needs to work the best for that person. There are advantages and disadvantages to buying a car or leasing a car. 

Here are some of them:

Other Automobile Loan Options

Car Loan in the Philippines is not just limited to the personal or business use of companies. Other purposes of taking an auto loan (car, truck, motorcycle, SUV, van, etc.) can be for the following business reasons:

• Car Rental
• Transport Service
• Cargo

Conclusion

Deciding to take a car loan to buy a car is a big step. But knowing where you can get a better offer in terms of monthly payments, loan term and interest is just as important as deciding which car to go ahead with. At the end of the day, one must always consider what car will best serve its purpose according to the need that you have for it.