Should you finance a car? Weighing the pros and cons

Thinking of buying a car but falling short on funds? No need to worry as it is a common problem that many prospective buyers face all over the world. Addressing this issue is the wonderful thing called car financing.

What is car financing? It is a way to borrow money to buy or lease a car. It involves a financial agreement between the borrower and the lender.

Considering that you are new to the world of car financing, we’d love to brief you on the subject quickly so that you don’t get lost in this big, scary (not so much) jungle. Firstly, you need to understand how car financing works. It’s pretty simple and involves the following -

• The borrower receives the money from the lender to buy a car.
• The borrower repays the loan along with the interest over a set time.
• The purchased car is used as collateral, meaning the lender can repossess it, in case the borrower is not able to repay the loan.

Did you know? The Consumer Act of the Philippines provides the borrower with additional protection by mandating the lenders to disclose the full terms of the loan agreement, this includes the payment schedule, interest rate, and any fees or charges.

Now that you have a broad perspective on how things work, let's check out the different modes of financing that you can choose from. Here’s a list of car financing tools -

• Bank
• Credit Unions
• Car dealership
• Family & friends

Each of these comes with its own set of pros and cons (which we’ll be discussing later) that you should go through and then settle for one that best suits your financial situation. But before going into such details, let’s discuss the pros and cons of car financing in general.

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

Car financing Understanding the ups and downs

Pros

When a car buyer opts for financing as a mode of car payment, he/she gets open to a world of opportunities and options. How? They are no longer restricted by the amount they have as savings to buy a car. Thus enabling them to get a vehicle of choice even with a tight budget. That being said, here are a few advantages of car financing.

Access to the latest models - One of the key advantages of financing a car is having the financial strength to opt for new, better, and high-end models that otherwise are out of your reach. The perk of spreading the cost over time allows the buyer to pick a car that offers the latest tech, advanced safety features, improved fuel economy, and much more.

Savings get saved for emergencies - Car financing allows you to keep your savings untouched and secure for other needs like medical or financial emergencies, an essential investment, or other financial goals. As per experts, financing as a tool allows you to maintain liquidity, thus offering greater flexibility in handling unexpected expenses and overall finances.

Better credit score - One of the key advantages of car financing is that you get to build and improve your credit score which in turn has several benefits like - ease in applying for mortgages and other loans. All you have to do is make timely payments on your car loan which in turn will demonstrate your responsible behavior and good credit management skills.

Budgeting gets easy - With car financing by your side, you’ll get to experience simplified budgeting, thanks to the fixed monthly payments one is required to make to the lender. With this known expense, you get to plan the overall monthly budget more efficiently. There is no strain of large, one-time payments that could disturb your budget fully.

Cons

Car financing indeed allows you to choose from a better and more advanced set of vehicles that otherwise were unapproachable, however, there is a downside to this tool as well.

High overall cost - When you take a car loan, you commit to making monthly payments that include interest as well which increases the overall cost of the vehicle. Over the loan term, the interest paid significantly increases the total amount spent on the vehicle. Wait, that’s not it, there are a few additional fees associated with car loans like processing fees and origination fees that further add to the vehicle’s cost.

Long-term financial commitment - Car financing is a long-term commitment wherein the borrower promises to repay the loan to the borrower over a set period (mostly in years). Such long-term financial obligations can impact the budget and ability to take up other financial responsibilities.

Depreciation - A car owner’s biggest enemy is depreciation, a term used to describe the decrease in the value of the vehicle over time due to wear and tear. A vehicle loses its value pretty fast and soon you may find yourself in a situation wherein the car’s value is less than the loan amount you owe. Depreciation also impacts the car’s resale value and insurance.

Also Read: Why your car loses value over time (and how to slow it down)

Repossession risk: Failure to make on-time car loan repayments can result in the lender taking possession of your car. Further, such defaulting will hurt your credit score and your overall financial stability. To further complicate your situation are several costs associated with car repossession like legal fees and loss of any equity on the car.

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

Car financing Pros and cons of different financing tools

Pros	Cons
Bank financing
Low interest rate	Car loan terms are often non-negotiable
Cheaper monthly amortization	Strict loan requirements for applicants
A pre-approved car loan is a possibility for clients with an excellent customer record
Getting discounts is possible, if you use bank’s other products like credit cards, etc.
Dealership financing
One-stop-shop for car buying	High-interest mark-up rates
Easy & convenient	Risk of falling prey to dealership’s aggressive selling techniques that lead to buyers purchasing a higher variant than what they could afford or getting additional services or products
More car loan options for buyers to choose from
Lenient loan requirements from applicants
Credit Union
Lower interest rate	Few in number and operate at a few locations only
Lower & fewer fees	One credit union is not connected to another, meaning each time when required, applicants need to travel to a particular credit union
More flexible in terms of credit score criteria, even provides loans to applicants with troubled financial past	No online or mobile service is available, every transaction is done at the location, in person
Friends & family
Flexibility in terms of freedom to repay (depending on the level of closeness)	Be diligent with repayment, or else the relationship can get sore
Extremely low interest rate
Personal touch

What if you have cash? Still, opt for financing or not

So, you have spare cash lying around that you would like to use to buy your car. It is a good idea to consider as it will save you from the burden of interest that comes along with car financing. This means you are free from the additional strain that interest puts on the monthly expenses and the extra cost that adds to the total cost of car ownership.

However, these are a couple of cons that one must consider before putting down all the cash at the dealer’s desk. The table gives you a glimpse into the pros and cons of cash buying.

Pros	Cons
No worries about the extra monthly expense	No credit score gets built with cash payment
You owe nothing to the bank or any lender	Vehicle options are limited to your savings
The car is yours, no questions asked	Depreciation will affect the value of the vehicle as soon as it is driven out of the showroom. You won’t be able to sell it for the same amount you purchased it.
You can sell it without the need for consent from the bank.
One-time payment and you are done

Essential tips for car financing

• Assess your financial well-being - Make sure to analyze your credit score, and understand your income and current financial obligations.
• Do proper research - In the Philippines, car financing can be done via several sources like banks, credit unions, dealership financing, etc. It is therefore advisable to shop around and compare each option before settling for one.
• Understand interest rates & loan terms - It is very crucial to understand car loan terms and the specifics of interest rates. The latter can greatly impact your total loan cost.
• Do not forget to negotiate - There is no need to hesitate while negotiating the terms of the car loan. Use your good credit score and other offers to leverage better terms. Many don’t know, but sometimes it is even possible to negotiate loan duration, interest rates, and some fees.
• Consider long-term costs - When financing a car, many applicants make the mistake of just considering the sticker price or monthly loan payment. What should be done instead is to consider the long-term costs of ownership which include insurance, maintenance, and fuel expenses. Factor in all these costs when considering whether or not you can afford a car without any financial strain.

Bottom line

Car Financing is a great tool to make use of when buying a car. It has several benefits like the opportunity to build a credit score, buy new & improved models, and preserve your savings. However, like every coin has two sides, car financing comes with its own set of downs, including high overall costs, concerns of repossession & depreciation, and long-term financial commitment. Therefore, it is advisable to carefully assess your financial situation, preferences, and most importantly get a clear understanding of the terms of the loan (interest rate, repayment schedule, and fees).

Also Read: Top 15 banks for affordable car loans in the Philippines