From loan to keys: Your complete guide to car financing in the Philippines

So, you have decided to own a car! Congratulations. But like many, you are still stuck between choosing the right vehicle with the best features, performance, and looks. This phase will end soon with the help of advice from friends & family and car experts; it is the next phase that is a bit tricky and involves car financing and insurance.

Most of us are a bit distinct regarding matters involving financing and insurance. The unheard terminology, documentation, paperwork, and legal applications make the matter worse. But what needs to be done must be done therefore, it’s better to get a fair idea beforehand so that when this arises, you are already well-versed.

While financing and insurance are equally important topics for a car buyer, today we’ll be concentrating on the former. As for the latter, we’d suggest you go through two of our blogs which extensively cover Compulsory Third Party Liability (CTPL) and comprehensive insurance in the Philippines - as they at least get started on the subject.

Also Read: Top reasons to get your car insured in the Philippines

Now, without any delay, let’s get to know all a car buyer needs to learn about car financing.

Understanding car financing

A prospective car buyer can go about the purchasing process either by paying cash or financing the vehicle. While the former is not everyone’s cup of tea and comes with its own set of pros and cons, it is the latter that we are suggesting.

Car financing, aka car loan, is a secured instrument designed to help prospective buyers get home their dream car. Here’s how it works -

• A lender provides the buyer with money to purchase a car.
• The buyer or the borrower agrees to pay back the money in fixed monthly installments over a decided period.
• The purchased vehicle, a car in this case, acts as collateral, meaning the lender has the right to repossess the vehicle if the buyer fails to repay the loan.

 

Important car financing/loan terms

When a prospective car buyer is out there in the financial lanes in search of a legitimate lender who can offer a loan at reasonable terms, he/she will come across several terminologies. The table below explains such components in detail.

Principal	The money borrowed from the lender.
Interest rate	Expressed in percentage, it is the cost of borrowing money. It may vary from lender to lender.
Loan term	The period over which the borrower repays the loan amount (principal + interest rate). In the Philippines, it ranges from 24 to 72 hours.
Monthly Payment	It refers to the monthly payment made to the lender (a portion of the principal & interest rate). It usually is a fixed schedule that’s followed.

Car financing/loan lender options

When it comes to acquiring a loan to get home your dream car, a prospective buyer is hit by several providers. Let us learn about different types of loan options in the Philippines. The table below explains each lender in detail.

Bank financing	It is a popular choice among prospective car buyers wherein banks offer loans to the buyers at competitive interest rates and flexible loan terms. In terms of requirements, the banks are pretty rigid with inclusions like proper documentation of income and a good credit score.  It is the best option for borrowers with a pretty solid record.
Dealership financing	Also known as in-house financing, it is a very convenient method as everything from car selection to finance is done under one roof. Lower downpayment and higher interest rates are its characteristics.
Non-banking Financial Institution	It is a flexible alternative to traditional financing options like banks and dealerships.  Caters to a wide range of applicants  Provides tailored loan options  Offers competitive rates  Flexible terms
Bank loan takeout	Though not a car loan, it can still be used to purchase a car. No collateral is required, and for that reason, interest rates are high. It offers faster approval and flexibility.
Personal loans	It is the best option for buyers looking for alternative financial options. It offers flexible terms and competitive interest rates.

 

Advantages of car financing/loan

We have already written a detailed article about the advantages and disadvantages of car financing. However, as we wish to curate a one-stop guide for car financing, the following table will provide a glimpse of it.

Ownership	Here, the buyer gets to drive the car home as soon as the loan is approved. Even though the ownership title is under the lender’s name, the buyers get to enjoy the new ride fully.
Affordability	It becomes super convenient for the buyer to manage his/her finances and monthly budget as the cost of the vehicle is spread over some time.
Credit building	On-time loan payment enables the borrower to build/improve the credit score. Remember, having a strong credit score has several benefits in terms of future loan approvals.
Access to more & better car choices	With a car loan by their side, a car buyer has at his/her disposal new and high-end models that otherwise would be out of reach if cash transaction was preferred.
Flexible terms	Lenders often allow borrowers to tailor the loan to fit their financial situation - employing flexibility in loan terms and repayment options.  One can choose between longer terms with lower monthly payments or shorter terms with higher monthly payments.

 

Step-by-step process of acquiring a car loan

Purchasing a car through a car loan in the Philippines is so much more convenient, as it allows the owner to spread the vehicle’s cost over several years. There is no burden of paying the full amount upfront, which requires a lot of ideal funds and comes attached with uncertainty risk requiring financial assistance.

Remember, with the right knowledge and little planning, a prospective buyer can get home a brand-new car without the worry of keeping the finances under check. Making things convenient, here is a step-by-step guide to attain a car loan.

Step 1 Set a budget

The first and most important step in getting a car loan is setting a budget, i.e., estimating how much money you can spare for the car every month. This would include not only the fixed monthly payment but also the fuel charges, registration fees, insurance premiums, and maintenance.

Suggestion: Thoroughly assess your monthly income and expenses in writing. Experts suggest that car loan payments should not exceed 20% of your monthly income.

Step 2 Choose a car

After setting the budget, it is time to finalize a car. You need to get answers to the following questions - what type of car is needed, small or big? What is your purpose for buying a car, daily commute, or family trip? Gas, electric, or hybrid?

In case you are confused or got overwhelmed after seeing so many options, here are a few things to consider to get clarity over the matter. The list includes -

• Car usage
• Maintenance cost
• Fuel efficiency
• Resale value

Step 3 Choose a lender

When it comes to car financing, car buyers in the Philippines have several options. Some of the most common options are Bank financing, dealer financing, credit unions, and peer-to-peer lending. We have discussed the pros and cons of each of these options here, go through them and choose the option that suits you best.

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

Step 4 Gather the necessary documents

After finalizing the lender, it is time to fulfill the requirements to get the loan process started. Some of the common documentation required include -

• Government-issued IDs like driver’s license
• Bank statements (last 3 to 6 months)
• Utility bills with your current address
• Income proof like a Certificate of Employment, recent payslips, business permits

Step 5 Apply for a car loan

Time to apply for your car loan application with your preferred lender, this can be done either online or in person. Here, you need to be prepared for a credit score check as it is part of the loan application process.

Don’t worry if your credit score is not that good, you’ll still be able to find lenders, however, with some downsides like high interest rates and larger sum down payments.

Also Read: Uncovering the impact of credit scores on car loans in the Philippines

Step 6 Loan approval & signing of the loan agreement

After submitting your loan application to the lender, the approval usually takes a few days to a week. Once approved, you’ll be handed the loan agreement contract; however, before signing, it is recommended that you review it thoroughly. Check what is a car loan arrangement and all about its key parameters here.

In case you notice an error or need to make some modifications to the contract, you can do so via endorsement. Find out more about the endorsement of car insurance policies here.

Step 7. Pay the downpayment & seal the deal

After signing the car loan contract, it’s time to pay the down payment, which typically ranges from 10 to 20% of the car’s value.

Step 8 Drive away!!

Congratulations, it’s all done. You have acquired the car loan, paid the downpayment, and now the car is yours to take home. Just remember to make timely monthly payments, or else you’ll find yourself in trouble. In the worst-case scenario, the bank can repossess your car.

Bottom line

Buying a car is a dream come true for many, and a car loan is a great instrument helping you achieve the same easily without any financial strain. However, the car loan process in the Philippines is a bit tedious and requires a little bit of prep (planning, research, and application). You can increase your chances of approval by maintaining a good credit score and by submitting full and accurate documentation. Remember, after getting the loan agreement, read the fine print to avoid unfavorable terms and hidden charges.

Also Read: Fixed-rate car loans explained: Is it the right choice for you?