Pasalo Car Financing: How it works & what to watch out for

Are you thinking of buying a new car? Sure, it is good to fulfil your dreams and enjoy the perks of owning a car, like the convenience of running daily errands or going on a weekend getaway with family and friends. However, are you concerned about the financial side of things? Broadly speaking, there are a few well-known ways of owning a car, including -

• Paying fully in cash, given that you have a big fat account at your disposal with no concerns about future emergencies or expenses. This one is favoured for its affordability, as it is interest-free; you only pay for what you buy.
• Financing via a bank, given that you can afford to pay the down payment, which is usually 10-20% of the car’s value. Here, you’ll be required to pay interest along with the principal amount over a fixed period.
• In-house financing, a preferable option when you need the car asap; it's quick and simple. However, here, you won’t be able to build credit as the loan is in the company’s name, not yours.

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

Wait, that’s not all, there’s one more less-popular car financing option that is now gaining some limelight - it is called pasalo or assume balance for a car. Confused, you aren’t able to make out what it means. Well, on the face of it, it might look a bit confusing, but with the right know-how, you’ll know how it is a great car financing option.

Intrigued? Continue to read, and by the end of it, you’ll be through with the concept of pasalo or assuming the balance of a car.

So, let’s begin…

Understanding the pasalo or assume balance for a car

What is a pasalo or assume balance? In the Philippines, pasalo or assume balance for a car is an alternative way of car financing. The process involves the buyer taking over the remaining auto loan balance from the seller.

Such a situation often arises when the existing owner of the car isn’t able to pay for the loan anymore and decides to sell. The buyer, therefore, is required to pay the remaining loan balance to the bank.

Note that for Pasalo car transactions to be legally binding in the Philippines, it is essential to get the lender’s approval. If the deal is done without a green signal from the lender, it could lead to complications like repossession of the vehicle.

Also Read: Car repossessed? Here’s how you can finance your next purchase

Pasalo or Assume Balance for a car: Parties involved

To fully understand the Pasalo way of financing a car, it is important to first know the parties involved in this particular transaction. Typically, there are three parties involved in the process -

• The seller
• The buyer
• The lender, mostly a bank

How Pasalo car financing works: A step-by-step guide for buyers

Let us now learn the working of the Pasalo car owing process. Typically, before anything is done or said, the seller first needs to seek permission from the bank or the lending company. Why? It is legally required, as the loan agreement usually has a condition stating that the borrower can’t pass the loan to a third party without prior consent from the bank.

If the bank denies permission, the borrower/seller will either cancel the transaction or still rescue despite the prohibition from the bank/lender. In the first case, there is no Pasalo deal, period. However, in the second case, the seller/borrower is at risk of car repossession by the bank as a measure to safeguard the loan amount.

However,  if the bank agrees,  the original car owner/seller will be able to sell his/her car to the third party. However, the buyer is required to pay the seller a specific amount before gaining the right to pay off the balance loan amount. Usually, this amount equals the amount already paid by the seller, including the monthly payments and the down payment. 

Now that you have the basic knowledge of the working of the Pasalo process, let us have a look at the steps involved - 

Step 1 - Getting approval from the lender

The first key step is to get permission from the bank or lending institution from which the auto loan will come. This step is very crucial from the pasalo process to work as most loans come with a non-transferable clause that cannot be waived without the lender’s consent.

Step 2 - Investigate the seller thoroughly

It doesn’t matter if the car seller is a friend, relative, or acquaintance; what’s essential is to look into their background. There is no scope for default, as you are putting in a big chunk of money in the deal.

Step 3 - Go through the car loan contract

After the seller, it is now time to investigate the car loan contract. Ask the seller to present the contract and look out for a clause that restricts him/her from transferring the loan to a third party. If you find one, ask the seller to show the written consent from the bank/lender wherein they waive this clause. Make sure to cross-check the letter with the bank to prevent any fraud.

Step 4 - Buyer-seller negotiation

Time to negotiate terms. The discussion mostly is about the amount the buyer will pay to the seller, which usually comes down to the down payment made and the monthly instalments paid by the buyer against the vehicle. There is a clear understanding that, moving forward, the buyer will be taking care of the monthly payments against the auto loan.

Step 5 -  Legal & documentation work

Post negotiation, both parties (seller and buyer) are required to sign a ‘Deed of Sale of Motor Vehicle with Assumption of Mortgage’. This will not only formalise the agreement but will also safeguard their interests. Furthermore, get the following documents ready - a valid ID proof (passport, UMID, postal ID, etc), proof of billing, NBI clearance, etc.

Step 6 - Make the required payment

It is now time to make the agreed-upon payment to the seller; you can do the same via cash, online transfer, or other legal methods. Also, by this time, you should have a Deed of Sale of Motor Vehicle with Assumption of Mortgage; it serves as evidence that the vehicle and the condition associated with it are passed on to you, the buyer.

Pasalo or Assume Balance for a car: Cost-benefit analysis

Let us now analyse Pasalo or assume balance by comparing the total cost and benefits of this tool. 

Cost

Car takeover deposit	The buyer has to make a one-time payment to the seller. This amount could range from PHP 50k to PHP 200k, depending on the car.
Monthly payments	The buyer must pay the remaining loan. He/She will make monthly payments to the associated bank or lending institution.
Vehicle ownership transfer	The buyer will be required to get the vehicle’s ownership transferred from LTO, which usually ranges between PHP 2,000 to PHP 4,000.
Hidden fees/issues	The buyer might incur the following fees/issues: existing fines, undisclosed damage in the vehicle, poorly maintained vehicle, or potential penalties (like failing to report or transfer ownership).
Insurance and repair	If the car is old and not well-maintained, the buyer needs to pay extra for insurance and repairs.

Benefits

Fairly decent vehicle options	There is a fair chance for prospective car buyers to find a one to three-year-old car that is still under warranty.
No down payment worry	The original owner has already done with the downpayment expense.
Flexible terms	The buyer usually takes advantage of the negotiation, getting a fairly nice cash-out or monthly setup deal.
Faster access to the car	The buyer can enjoy his/her new ride almost immediately; usually, there’s no long waiting period.

In conclusion, the pasalo transaction is good for you if the paperwork is all done, clean and notarised, the seller is trustworthy, and you can manage paying the due amount without any hassle. However, things might take a dark turn if the concerned vehicle has several unpaid dues or maintenance/repair issues, or there’s an issue with the ownership transfer.

Pasalo or Assume Balance for a car: Associated risks

Certain warning signs indicate potential problems and unhealthy dynamics. If you notice any of these, try to stay clear.

• There’s a risk that the bank may not approve loan assumption or ownership transfer, here the car stays under the original owner’s name. So, you’ll end up paying for a car that isn’t legally yours.
• The buyer is at the risk of inherent past due balances, LTO violations, etc.
• A lack of paper trail can put you in a high-risk situation, leaving you with no legal protection.
• If the insurance is still under the original owner’s name, and the car gets into an accident, the buyer’s claim will be denied, leaving you without any protection.
• There’s no guarantee that the car was well-maintained and taken care of by the original owner. Leaving you stuck with repairs the seller didn’t disclose.

Checklist before finalising a Pasalo deal

• Proper car verification - Make sure to get a copy of the car’s OR/CR and verify them.
• Car loan verification - If possible, ask the bank or financial institution for a statement of account. Check the remaining balance, monthly amortisation, and payment history. Further, verify if the loan is in good standing or not.
• Vehicle condition - It is essential to inspect the car properly, check for the history of repair, accidents, and other major issues. Do a thorough test driver and confirm all features are in working condition.
• Check the legitimacy of the seller - It is essential to ensure the genuineness of the seller. Ask for at least two valid IDs and make sure he/she is the registered owner of the vehicle.
• Insurance & ownership transfer - Get the vehicle’s ownership and insurance policy transferred. It is advisable to visit the LTO office to check if the concerned vehicle is transferable.
• Financial readiness - It is essential to be financially prepared for the upcoming expense. We’d advise you to have the cash ready, budget the monthly payments and expenses that come with car ownership, like gas, insurance, and maintenance. 

Bonus tip: Opt for a safer alternative

The alternative to Pasalo car financing comes in the form of Car Loan Takeout. 

 

What is Car Loan Takeout?  This particular financial instrument allows the car owner (who is unable to manage the monthly payments) to refinance the existing auto loan, which will result in lower monthly payments. The result is - rearranged loan terms - reduced interest rate & reduced loan period/term, and car ownership is retained.

Bottom line

 

Assume balance for a car or Pasalo car is a great unconventional, and legal way to buy a car in the Philippines. While the car is second-hand, with a meticulous seller backing, the buyer can catch hold of a car that’s fairly brand-new at a much lower price and interest rate. However, it is not a fool-proof, goody-goody deal; one needs to be cautious of scamsters with shaky deals.

Also Read: Lease vs. Buy: Which car financing option fits your budget?