You're not alone if you need a car but don't have the money to buy one because such is the situation for many people in the Philippines who cannot afford even used automobiles, let alone brand-new ones. Because many of us rely on cars to do our everyday duties, you may get on the road with the help of an auto loan. Since the world of vehicle loans can be perplexing, it's best to start with the basics. Understanding how a car loan works is the first step in securing a good deal.
What is an auto loan?
A car loan allows clients to purchase a vehicle and pay for it over a given period. It identical to a personal and is provided by banks or financial institutions. People who are looking to buy a car can minimize their initial cash expenditure by borrowing a portion of the cost from a car loan provider. Borrowers who have a consistent gross monthly income and a good credit score can also benefit from fixed interest loans, which ensures the price you pay during the loan period is fixed.
How does an auto loan work?
Car loans provide a single sum of money to acquire a vehicle. The lender keeps the title to the automobile until it is completely paid off. The lender also have the right to repossess the vehicle if the borrower stops paying their due. To avail of a car loan, you must apply for a loan from a lender and get approval on the merit of your documents. The list of lenders include banks, credit unions, Internet lenders, and vehicle dealerships.
Many lenders swiftly calculate the loan pre-qualification and give an anticipated interest rate based on the borrower's credit history. When a person discovers an ideal vehicle, they tend to choose the presented financing plan. Once they are sure, without thinking much, they complete a detailed application and wait for the lender to validate their details to authorize the loan.
Following your car purchase, you will get an email confirmation containing all the details about your loan. Many banks will cut your interest rate in exchange for your permission to automate EMI payments.
Where can I get an auto loan?
Auto loans are available from several financial organizations in the Philippines, where most of these lenders are banks. Here are the most prominent financial institutions of Philippines that provide auto financing.
Credit unions
If you're in the market for a vehicle and need to finance it, think about getting a car loan from a credit union. Credit unions usually have cheaper interest rates and minimum loan amounts when compared with banks. Furthermore, because of their long-term relationship, credit unions are more inclined to provide its members with a car loan even if their credit score is not so stellar. Credit unions are nonprofit entities, and they have to reinvest their earnings in their members to sustain. As a result, they may provide their members with lower-interest loans. As per research, credit unions' auto loans are up to 2% cheaper than the average market rate.
Apart from that, credit unions are allowed to offer lower loan amounts when compared with its other competitors. A lower loan amount may be helpful if you are not acquiring a high-priced vehicle and you only need to finance a small portion of your purchase.
Online auto loans
There are many loans available online, which makes it challenging to choose the best suitable option. Consumers who look for car loans online may shorten the financing process by studying the critical qualities of each lender and their loans to choose the one that best meets their needs. If approved, an online lender's car loan may provide additional benefits as you progress with the auto financing procedure.
While using this option, applicants may acquire pre-approved car loans conveniently without having to fill out extensive handwritten paperwork or wait for days for a proper response. They may shop at the dealership with the confidence of a cash buyer since they already know the parameters of their final loan approval, so no surprises await them.
Auto dealers
In certain situations, a loan from a vehicle dealer may make the most sense for you, but it's still a good idea to look around before choosing it. A vehicle loan through the dealership may be the least expensive financing choice if you are eligible for 0% APR, annual percentage rate, financing, or other incentives, such as car rebates or bonus cash, that specific dealers provide. Keep in mind that you'll need an outstanding credit score to qualify for these incentives, and you'll almost certainly need to finance via the automaker's financing arm.
Although some banks consider people with less-than-perfect credit, you may find that being approved for financing through a dealership is easier. A dealer usually have relationships with a variety of lenders and may be able to assist you with financing. There are also some dealers that have departments dedicated to aiding consumer financing with bad credit. A word of caution: some dealerships target customers with poor credit and offer in-house financingwhere they act as a lender. In this case, your loan will be given by the dealership rather than a bank or credit union.
Banks
Talking about banks, they provide borrowers with pre-approved auto loans and also the general auto loan. They also allow borrowers to compare interest rates and select the best suitable offer. Banks may advertise cheap or competitive rates, but these bargains are typically reserved for people with what they consider to be strong credit. The automobile you want to buy may also limit your options for bank financing. Some banks refuse to fund cars that are too old or have accumulated too many kilometers. Finding a bank that would provide a vehicle loan might be difficult if you want to buy a used car. It should be noted that the bank's credit policies are more stringent than any other lenders.
Significant types of auto loans in the Philippines
There are several types of auto loans available in the country. The borrower must consider all available alternatives and select the one that best suits their needs. Some examples of vehicle loans are given below.
Secured auto loans
In this case, the automobile acts as collateral for the loan, which allows the lender to confiscate and resell it if the borrower fails to make payments. This is accomplished through the use of a lien, which is a sort of contract. The lender is listed as the lienholder on the car's title, entitling it to the custody of the vehicle until the obligation is repaid. Automobile loans are most of the time secured loans.
Unsecured auto loans
The lender relies more on the borrower's guarantee that the debt will be repaid with this sort of loan because there is no collateral. Auto loans without collateral are less common and may have higher interest rates than loans with collateral.
Simple interest loans
The outstanding principal at the time of payment is utilized to compute interest on this loan type. For example, if you paid down a ₱200,000 debt to ₱100,000, your claim would be calculated simply on the remaining ₱100,000. Borrowers who pay off their loans early may save money with a low-interest loan offered by lenders.
Pre-calculated interest loans
The interest is calculated for the loan duration and divided evenly between the monthly installments. This method of calculating interest is more restricted than simple interest since you would still be paying the same interest each month even if you paid off half of your ₱20,000 loan.
Internal funding
Dealerships with in-house financing are recognized for offering buy-here-pay services, in which the automobile is sold along with the loan. Buy-here-pay dealerships frequently cater to people with bad credit, and their interest rates may be higher than those offered by other choices.
Direct financing
Customers can get loans from lenders, including banks, credit unions, and internet finance companies, to buy a car from a dealer or a private seller. This strategy makes it possible for the consumer to obtain pre-approval for their loan before they look for a vehicle and is a simple way to compare loan offers.
Direct financing
Customers can obtain loans from lenders such as banks, credit unions, and online financing businesses to purchase a vehicle from a dealer or a private seller. This technique allows the client to get pre-approved for a loan before looking for a car and is a straightforward way to compare loan offers.
Loans for both new and secondhand vehicles
Loans for new and used automobiles often have different characteristics depending on the type and model of the customer's vehicle and other factors. According to Experian statistics, a brand new car costs more than used cars, and average loan amounts and car payments are likewise higher. The intermediate-term for new automobile loans is more significant than used car loans. Auto loans for brand new vehicles usually have lower interest rates. This is partly because new cars have a reduced risk of repossession and are more straightforward for lenders to appraise as assets if they must be seized.
Private loans
This auto loan is for those who buy a car from a private seller rather than a dealership. There are various factors to consider while using a personal party auto loan, such as whether the vehicle has an active lien or the seller still owes money on their loan.
Lease buyouts
A lessee frequently has the option to purchase the vehicle after the lease term for a specific price. The buyer of a lease buyout loan might continue to pay the lender until they fully own the car.
How to apply for an auto loan in the Philippines?
The lender determines a car loan application. Some lenders provide an online application, some offer an offline application, and others provide both. To successfully apply for a vehicle loan, you must follow these procedures in each circumstance.
Examine your credit report
Your income and credit score will impact your capacity to borrow money and the interest rate you will be charged. Applying for a car loan without examining your credit record is not a good idea. If there are any errors or erroneous information on your report, you may not be accepted for a loan. Similarly, you can also be offered a higher-interest rate. Every 12 months, the central reporting bureau supplies people with a copy of their credit report. Before applying for a vehicle loan, you should review your credit report for mistakes or signs of error and register a dispute if necessary.
Request auto loans from several lenders
After you've reviewed your credit report, it's time to look into auto loans and lenders. Even if you intend to use dealership financing in the future, you should first compare quotes from several lenders. If you agree to have your loan payments routinely withdrawn from a checking account at your bank or credit union, they may be able to offer you a lower interest rate. You may also conduct an Internet search for auto loans. Check with each lender to determine if buying your automobile through a private individual rather than a dealer or broker is acceptable. Some places restrict where you may purchase a car.
Obtain pre-approval for a car loan
Once you've narrowed your search to a few lenders, request interest rates and compare offers. Encourage lenders to compete for your business to get the best deal. Furthermore, because lenders assign weights to different aspects of your credit history, interest rates on auto loans might vary substantially. Before applying to a lender, you may be prequalified or pre-approved for a loan. These are unique, and understanding what they all signify is crucial. Pre-qualification indicates the interest rate and the loan amount you could qualify for based on the little information the lender has about your credit history. Pre-qualification involves a "soft" credit draw, which does not affect your credit score. However, if a thorough credit check is completed, the anticipated rate you are quoted can alter significantly.
Set your budget with the loan offer
The maximum loan amount listed in your pre-loan acceptance offers does not represent the cost of the vehicle you may buy. To account for taxes and fees, increase your budget by 10%. A car loan calculator is designed to estimate the optimum monthly payment for your budget. Enter the down payment, the trade-in value of your current vehicle, and loan terms. Remember that the pre-approval offer is only a ceiling; you can borrow much less if the payment is too high. Even if the bank believes you can afford more, comfortably paying your loan payments is far more critical.
Find your automobile
Now comes the exciting part: selecting your new car. You currently have financing offers and know the most expensive car you can finance. Review the loan offers for prohibited brands, dealership criteria, lender requirements, and time limits to avoid disappointment once you've decided on a vehicle.
Examine the dealer's loan proposal
After you've taken a test drive and found a car that meets your needs, you may still be able to acquire an even better loan rate from the dealer. Automobile manufacturers formed banks only for dealership-based auto purchases and occasionally gave loan rates lower than the market. Once the finance manager finds that you have been pre-approved for an offered rate, he or she will undoubtedly try to undercut that rate to obtain your business. It is not a bad idea to apply to see how low your interest rate may go. Furthermore, even if you don't want to play the game, let the salesman know that you are already pre-approved. Inform the dealer that you are a cash buyer so that you can solely negotiate the price of the automobile and not the monthly amortization.
Select and complete your loan
If the dealership beats your pre-approved rate, you may be sure you got an outstanding loan (and the other conditions are the same). You have the option of rejecting your previous offers and accepting this loan. Simply read the contract carefully before signing it to ensure no hidden clauses. If you wish to use your pre-approved request, complete your vehicle loan application and funding as advised by the lender. A dealership representative may call the lender to begin funding; if this is not the case, you will need to do it yourself.
Make monthly amortization on time
You're ready to go after your vehicle loan has been approved. Paying down your car loan on time is something you should keep in mind. Your lender will most likely provide you with online access to your loan information so that you may set up automatic payments. By taking the time to do this, you may develop a history of timely loan payments, which is essential for your credit score and your ability to secure a loan with better conditions in the future.
Who is eligible for an auto loan?
To be eligible, you must be a Filipino citizen between the ages of 21 and 65 at the time of loan maturity and have a gross monthly income of at least ₱30,000 (amount may vary based on the lender). A co-income maker may be considered if the borrower's monthly income is less than the needed amount. Knowing that a specific lender may require the borrower to have a stable work for at least two years is essential before applying for a loan. This will increase their trust in your ability to repay their loan.
For OFWs
OFWs working or residing overseas may apply for a vehicle loan locally as long as a related or qualified Filipino citizen, guarantor, or co-maker is present. Foreign nationals who live or work in the Philippines qualify for an auto loan if they have their most recent income tax return (ITR), an audited financial statement, and a bank statement. If they have a qualifying co-maker or guarantor who is a Filipino citizen and is accepted by their present employment, they may also be eligible.
Loan documents
Although the documents may vary depending on the lender, basically, you must provide the following:
Locally employed borrowers
A properly completed application form.
Legitimate government-issued I.D.s, bearing the borrower's and co-signature makers and a photo, such as a driver's license or passport (if available).
The newest evidence of billing.
A copy of the latest income tax return (ITR) and Certificate of Employment (COE) with compensation.
Paystubs for the previous three months.
Most recent audited financial statements.
Most recent bank statements.
Business owners of self-employed
Certificate of Business Registration with the DTI or SEC if the entity is a partnership or corporation.
Current ITR.
Recent financial documents include your passbook in a Xerox or your most recent audited financial statements, statement of assets and liabilities, statement of income and expenses, bank statements, and statement of assets and liabilities.
The most recent evidence of supplementary or other income, such as stock certificates, lease contracts, or certificates of deposit.
Most recent income tax return (ITR).
OFW
The Philippine consulate validated the latest employment contract.
The latest crew contract is required for anyone operating as seafarers or seamen.
Evidence of payments made in the last three months or longer.
Most recent audited financial statements.
Most recent bank statements.
Most recent income tax return (ITR).
Income documents.
How to repay an auto loan debt?
A borrower has several alternatives for repaying their vehicle loan. One option is to settle the loan in person with cash or post-dated cheques (PDCs). Other banks, meanwhile, accept payments through BayadCenters at shopping malls or analogous branches. On the other hand, online lenders are arguably the most practical option since they allow you to make safe payments whenever and anywhere you choose as long as you have an Internet connection.
Obtaining a vehicle loan is straightforward as long as you meet (or exceed) the lender's standards and can make on-time monthly amortization payments. Always register your vehicle with the lender, maintain it regularly, and drive cautiously to avoid any problems throughout the loan period.
Pros and cons of auto loans
It is worth checking out these pros and cons before applying for a car loan.
Pros
When you buy a car on loan, you don't have to pay the entire amount upfront. Instead, the payment is stretched over several months.
There are several alternatives available for auto loans, so you should be able to find one that fits your budget, whether you're searching for a hire purchase (HP) or personal contract purchase (PCP) deal.
Getting a car on loan also has the benefit of raising your credit score.
Cons
You'll be required to pay interest on just about any form of borrowing.
Auto loans are secured loans, so if you can't make your payments, you risk having your car repossessed.
There is a reasonable probability that the vehicle you take out loans for will be a modern model with a high value. Your insurance rate may increase as a result.
Legal regulation of the car loan industry in the Philippines
The Securities and Exchange Commission (SEC), the Lending Company Regulation Act (R.A. No. 9474), the Bangko Sentral ng Pilipinas (BSP), and other lending rules all regulate auto loans. Other lending restrictions include acceptable interest rates charged to borrowers by financial institutions and yearly loan limitations. These regulations keep lenders from charging extravagant fees and usurious interest rates.
Securities and Exchange Commission (SEC)
The SEC is a legal entity that ensures that all lending institutions in the country follow all applicable laws and regulations. The SEC requires all financial service providers to provide information so that potential borrowers may make informed borrowing decisions. It can also penalize lenders that overpay for vehicle loans or fail to provide consumers with acceptable conditions. The SEC may suspend or revoke its license if a corporation violates any automobile loan laws or regulations.
The Bangko Sentral ng Pilipinas (BSP)
The Philippine Central Bank, or BSP, is responsible for maintaining price stability, a stable financial system, and a productive payment system. It acts through its Monetary Board. As a central bank, the BSP governs and supervises car loan lenders to ensure that unethical lending practices are avoided.
The Lending Company Regulation Act (R.A. No. 9474)
Before they may lawfully operate, lending organizations must register with the Bangko Sentral ng Pilipinas (BSP) and apply for an operating license with the Securities and Exchange Commission (SEC). The primary purpose of this regulation is to protect customers from dishonest lenders who prey on those who need money but cannot obtain it via the appropriate channels. The legislation also controls interest rates established by lenders via the SEC, guaranteeing that predatory lending practices used by dishonest lenders do not jeopardize borrowers' interests.
The actual cost of an auto loan
The maximum amount a client can borrow and repay over a 12- to 60-month period is 80% of the car's cost. However, before releasing the loan, the lenders may want you to make a down payment of at least 20% or as much as 50%, depending on the cost of the car. Interest rates can be as low as 4% per year or as high as 20% per year, depending on the lender, with an average loanable amount of ₱100,000 to ₱1,000,000.
Conclusion
Purchasing your dream car involves more than just the cash outlay; it also consists of paying for fuel, upkeep, insurance, and depreciation on the vehicle. These are many additional monthly expenses that must be taken into account. How many passengers will be regularly riding in your car, what kind of automobile do you need for the trip, and if you'll be traveling in the city or the country. Lastly, should you buy a new car or a used car? Nowadays, it's growing simpler to purchase a high-quality used automobile with loans, so it's worth looking into.
If you take out a loan, your budget should always be within your means, with extra money for needs such as gas and maintenance. Overstretching yourself puts you in danger of not being able to make payments, which might end in bank repossession, which not only results in the loss of your automobile but also reduces your credit score and makes it more challenging to secure loans in the future.
