Bank vs Dealer Financing: Which is better for Filipino car buyers?

Buying a car is not easy. First off, the amount of money involved is too much, plus the plethora of options and the lack of technical knowledge make the journey quite challenging for an individual. However, thanks to the not-so-useful individuals (relatives) and some helpful hands (car enthusiasts, car buying websites like Carmudi, etc) things get sorted. But only for a short time.

Yes, the bubble gets busted right after you have shortlisted a car, and the ‘pin’ that is responsible for the damage is called FINANCE.

Financing a car is not easy unless you have generous parents who are willing to do the needful or you are smart enough to save all that’s required. If that’s not the case, then my friend, we welcome you to the world of car finance.

What is car financing? It is the process of borrowing money (from a bank or a financing institution) to purchase a car with repayments made over a defined period of time in installments.

 

Instead of paying the car's full price upfront, buyers enter into a loan agreement with a lender wherein the principal and interest are paid over a defined period.

A buyer need not pay the entire price of the car upfront, instead, he/she can enter into a loan agreement with a lender and repay the loan every month, bit by bit. But there is the added cost of interest, a small price for the convenience this financial offer provides.

Car financing options in the Philippines

A prospective car buyer in the Philippines has several car financing options.

Let us check out some of the most common car financing options in the Philippines -

Bank financing

One of the most common car financing options is via bank. Here the borrower directly approaches the bank, does the needful (filling out forms, agreeing on the terms, document submission), and acquires the loan.

Dealer financing

Provided by the dealership, this option clubs car purchase and financing into one transaction. Unlike bank financing, it offers quicker approvals and promotions like zero downpayment deals.

Leasing

Leasing is another great alternative to finance a car in the Philippines. Here the prospective buyer is required to pay a monthly fee for a fixed period to use the car. At the end of the term, he/she can either renew the lease or buy the car. There is also an option to return the vehicle.

Peer-to-peer lending

When individual lenders and borrowers match with each other via dedicated online platforms, it is called peer-to-peer lending. A major characteristic of this type of financing loan is flexible requirements, however, one should be careful with the terms and lender credibility.

Out of the four car financing options in the Philippines, bank and dealer financing is pretty common. The two come with their own set of advantages and issues, with each solving the problem of a different kind of borrower, depending on the need and preference.

Today we’ll be discussing both options in-depth making the car-buying journey easy and fun. But before that let's get the basics clear.

Bank vs. Dealer Financing The better option for Filipino buyers?

Bank financing and dealer (in-house) financing options have their own set of pros and cons. Therefore, the answer to the question ‘Which financing option is better?’ largely depends on the buyer's financial situation, interest rates, and preferences.

The table below measures both these car financing options on different parameters and by the end we hope to find the better option.

 

Parameters	Bank Financing	Dealer Financing
Overview	A car loan is directly provided by the bank. The bank evaluates applicants' financial capacity and credit history before approving the loan.	It is provided by the car dealership. Known for its convenience and quicker approval times, this option often includes attractive promotional packages but generally comes with higher interest rates.
Interest rate	Bank financing generally has lower interest rates, ranging from 4% to 7% annually (depending on borrower's creditworthiness).	Dealer financing mostly offers loans at higher rates often ranging from 10% to 20% per annum.
Cost	Lower interest rates translate into lower overall costs.	Higher interest rates make this option significantly more expensive over time.
Approval process	Banks usually have strict requirements when it comes to loan approval. Good credit history, proof of stable income, and sufficient documentation are needed. Also, it is a bit time-consuming compared to other options.	It is more lenient and fast, often approving applications within hours. It is ideal for buyers with weaker credit or those in urgent need of a vehicle.
Downpayment requirement	Banks typically require a downpayment of 20% to 50% of the vehicle's price.	Most dealer financing players offer "all-in" or zero downpayment promotions, which may appeal to buyers with limited initial cash.
Loan term flexibility	Loan terms range from 12 to 60 months. Banks often provide flexible repayment options and allow borrowers to negotiate terms based on their financial circumstances.	Dealer financing loan terms also range from 12 to 60 months, however, unlike bank financing it offers fewer customization options.
Additional benefits	Banks rarely offer incentives like free insurance, registration, etc. and instead focus on offering competitive rates and personalized customer service​.	Dealer financing, on the other hand, offers free insurance, registration, and chattel mortgage fees.

Bank vs. Dealer Financing Ideal scenario for each option

Now that we have discussed the two car financing options in detail over different parameters. It is time to find out the ideal scenario to opt for each option.

Bank financing

If you are someone with a good credit history, and stable income, and are in no rush, then bank financing is a good option. Also, it is the only option to offer significant savings over the loan term due to lower interest rates.

Dealer financing

If you prioritize convenience, need quick approval, or lack a strong credit profile, then dealership financing is the way to go. The deal becomes even better when the dealership offers attractive promotions.

Bank or Dealer Financing Key factors to consider when choosing

Still confused? Here are a few factors to consider at your end before making a final call for a seamless car financing journey.

Monthly budget: Loan applicants must ensure the monthly installments fit comfortably within his/her budget.

Loan term impact: It must be noted that longer loan terms result in lower monthly payments but higher overall interest. So, be wise when settling on loan terms with the bank or dealership.

Hidden cost: Make sure to check the hidden fees in dealer financing as it can increase the effective loan cost.

Bottom line

Choosing between bank and dealer financing depends on your financial goals, urgency, and other long-term considerations. While bank financing is more economical for those who meet the institution’s stringent criteria, dealer financing offers convenience and flexibility for buyers with limited credit or urgent needs. However, before the final call, make sure to compare rates, understand the terms, and check the hidden costs.

Also Read: Understanding Balloon Payment: A flexible financing option for Filipino buyers