Car financing can be extremely useful when you need to buy a car but don’t have the funds to completely pay for the cost. This car purchasing method offers plenty of advantages, but it is not without its drawbacks.

If you’re planning to enter into a car financing agreement, it pays to know the pros and cons of the car financing process. By knowing what to expect, you’ll be better prepared to handle the downsides that may come your way.

Car financing in the Philippines: An overview

Car financing processes in the country are governed by the Consumer Act of the Philippines, a law which covers the guidelines that a lender and borrower must adhere to.

The Consumer Act is designed to provide protection for both entities. As a binding commitment, the lender providing the car financing must provide the borrower with the approved amount and fulfill his obligations as stipulated in the contract. Meanwhile, the borrower must be able to make his monthly payments before or when it’s due.

Now that you know the responsibilities of each entity involved when buying a car on finance, let’s take a closer look at the different modes of car financing, along with the advantages and disadvantages of each:

Banks

Banks are practically the primary go-to establishments for all types of financing. They are a popular loan option for a lot of good reasons, and some of them are listed below:

Pros

Accessibility – Banks are plentiful, and there are even banks that are open on weekend for added convenience. In addition, major banks provide mobile and online tools that allow borrowers to apply for and pay for loans online.

Stability and security – Bank loans are generally far more secure than loans provided by other financial entities. Low and consistent interest rates are immediately available for those with good credit and reliable payment history.

Cons

Fees – banks are notorious for charging fees for everything. Interest rates – Though banks offer competitive rates, they are typically one or two percentage points higher than credit unions.

Credit Unions

Generally speaking, credit unions are non-profit, member-owned financial institutions that provide financing services to its members at reasonable rates. A good example of this is a community or company cooperative that allows its members to apply for loans.

Pros

Lower loan interest rates – Credit unions generally offer the same financial products as banks, albeit at a much cheaper rate. Fewer fees – Credit unions typically charge lower and fewer fees than banks. Case in point—withdrawals and electronic transactions are usually free of charge.

More flexibility – Banks require you to meet a certain credit score before they even begin to deal with you. On the other hand, credit unions are more willing to work with you even if you’ve had financial troubles in the past. This is because credit unions are smaller in size and scope and practice a member-centric philosophy.

Cons

Less locations – a credit union’s size is its biggest disadvantage. Since they are small, they usually have very few locations. In addition, credit unions aren’t usually linked to each other, so transacting with one means you can’t transact with other locations.

Non-existent online and mobile services – With credit unions, every transaction will likely need to be done at their location. You won’t be able to perform any financial action with them otherwise.

Ask your credit union about car financing

Car Dealership

Many car dealerships nowadays provide their own financing services for the vehicles they sell. This type of financing is more popularly called in-house financing.

Pros

Convenience – If you obtain financing from the dealership you are buying from, that can be the ultimate in convenience, because it’s practically a one-stop-shop way of owning a car. Even with a low or non-existent credit rating, you can still qualify for a loan.

Get the car you want – With banks and credit unions, your choice is often limited by your credit in finances. In-house financing can get you on the driver’s seat of a car that’s well above your pay grade.

Cons

Sky-high interest rates – Generally speaking, in-house car dealership interest rates are significantly higher than those offered by more traditional lenders. That said, the high interest rates of an in-house dealership can be countered by making a sizeable down payment.

Sales-pitch financing – Dealership salespersons want to sell you more than just a car, and will try to entice you with big sales pushes and add-ons to make you spend more than you can.

Family and Friends

Filipinos are a family-centric society, and as such, it’s pretty common for a Pinoy to first ask family and friends for financial help. Of course, those of us who can are more than willing to provided that much-needed monetary assistance. However, like any source of financing, borrowing from a family or friend has its own benefits and drawbacks.

Pros

Flexibility – Depending on your level of closeness, friends and family will often give you a lot of leeway and tell you to pay when you’re able. Extremely low interest rates – If they even ask for an interest on the amount you borrow, you can be sure it’s smaller than what any other type of lender can provide.

Personal touch – It doesn’t get more personal than friends and family.

Cons

Your relationships could suffer – Even if you’re borrowing money from someone close to you, you need to treat it as a formal business transaction. This means that you need to be diligent with your payments—don’t wait for them to ask you to pay up. Otherwise, you could end up severing your ties with them.

Car financing is the traditional way to pay for a vehicle purchase, and it’s the only way to go for people who can’t afford to buy a car in one go. To help minimize the impact of a car financing agreement on your cash-on-hand, limit your car options to what you can afford with your current budget.

So how much should you pay for your new car? As a general rule, your monthly car payments should only amount to 20 percent of your gross monthly income (your salary every month before deductions). Stick to this rule and you may find yourself sailing comfortably toward your ownership of the car.