What Types of Car Financing Are Available?
Most Filipinos today are more confident and ready to take out a loan when they buy a new or used car. Thanks to a booming economy, better transparency in the financing process, better rates, and the proliferation of information via the Internet, car buyers today are more educated about the benefits and risks of getting a car on finance, and thus are able to make better decisions for their transportation needs in the present and future.
If you are interested in financing a car purchase, below is a list of the types of car financing available in the Philippines. Choosing the best way to pay for your car is an important decision, so take time to carefully evaluate each of the following options and how they apply to your particular situation:
## Car Loan from Banks
Banks are often the easiest car financing route to take because most likely, you already have an account in one. Plus, banks have plenty of branches for you to transact with, even online if you have such an account setup. If you want the lowest interest rate, then a bank is one of your best options.
Application and approval processes are usually quick, because it’s easy for them to obtain the necessary information. Even when you are still paying for the car, you are listed as the vehicle’s owner.
With a bank loan for car, you can spread the monthly amortization up to five years, though it’s important to keep in mind that the total amount that you have to pay will be higher with a lengthier loan. Additionally, you need to ensure that you have a good credit rating, otherwise you may find it difficult to get approved.
## Car Loan through Credit Unions or Cooperatives
Credit unions and cooperatives are nonprofit financial institutions that can offer more competitive rates than banks, but you need to be a member before you can get approved for the different types of car loans they provide.
The biggest advantage if financing through a credit union is that they’re not as strict with credit scores as banks are, so even with a failing credit rating, you can still get approved for a car loan.
## Car Loan through Lease
In a car lease, the lender buys the car then leases it to the borrower. The borrower pays the lender with fixed monthly payments and is responsible for any maintenance and repair that the car may need over the term of the lease.
Once the lease period expires, the borrower has the option to return, refinance, or buy the car by paying the remaining amount. Unlike auto financing through banks, the borrower isn’t the listed owner of the car, but the option to own is available at the end of the contract.
## Home Equity Loan
Financial institutions are more willing to lend borrowers money if they can use your home as equity. Money obtained from a home equity loan can be used for a variety of purposes, such as funding the purchase of a new or used car.
![Home equity loan>(//images.contentful.com/6px19mtg14gc/5Nr5w4YyXK2Is0mg0iiOUK/0b2e4f8b40b6e93ea0a198fddd09cf80/Home_equity.jpg)
## Dealership Loans
Dealership car loans, as the name suggests, are loans offered directly by dealerships to their car buying customers. Dealerships are well-connected to many different lenders, and this can help you get approved for a loan quickly without the need for a lot of paperwork.
That said, plenty of research needs to be conducted on your part to understand the rates and terms being offered, because dealers tend to charge the highest interest rates among car finance providers.
How higher, you may ask? According to industry experts, dealership interest rates can be up to 5 percent higher than traditional lending facilities. That may not seem like much, but it can add up to a significant amount in the long term.
## Credit Card
As long as your credit limit is high enough, it’s possible for you to buy a car using your credit card. However, not all dealers will accept this mode of auto loan payment, and may levy certain fees if they do.
One great thing about credit cards is that many of them allow zero-percent interest on purchases for a set period of time, so if you’re able to work with the given time frame, you can avoid paying interest completely.
## How Does Car Financing Interest Work?
Typically, the interest in an auto loan is computed using a ‘simple interest’ scheme. In this scheme, the amount that the borrower must pay for is computed by multiplying the original principal with the interest rate, then multiplying the result with the period of time that the principal earns interest.
If the original principal represents ‘P’, the interest rate represents ‘R’, and the period of time represents ‘T’, then the equation for computing simple interest is SI=PRT.
Simple interest is vastly different from compound interest, the latter of which totals up to a much larger cost for the borrower. That’s why if given the choice between the two, you should always insist on a simple interest loan.
## How to get the best car financing deal?
A little financial savvy can go a long way. Follow these tips to get the best car financing deal possible:
### Look at the bigger picture
While low monthly payments are very attractive, consider the total amount owed. Low interest auto loans with a lengthy loan term could cost you more in the long run than a shorter one with higher rates.
### Shop around
Different loan providers—even different dealerships of the same car brand—can differ in their loan amount offerings. Some may even provide huge discounts for their cars for sale, especially if it’s an end-of-generation vehicle.
Reach out to as many loan providers as you can, ask for a car loan quote, and then compare and contrast their rates. Use an online car loan payment calculator to know how much you’re going to pay for each quote.
### Improve your credit score
It’s possible to negotiate better rates if you have the credit score to support it. Know your credit score and get pre-approved for a loan to have better negotiating leverage.
Don’t sign anything right away—take some time to sleep on it. Evaluate the terms and conditions carefully before you finalize the deal. If there’s anything that you don’t understand, it can help to have a financial advisor, CPA, or lawyer explain it to you.