Go! Auto Loan

Payment for the vehicle is deferred over a number of years and is split into monthly installments. The arrangement helps the borrower maintain financial flexibility by avoiding a large, up-front payment while the creditor profits from the interest charged in the transaction.

Car loans are not limited to simply cars and other private vehicles. Vans, trucks and other vehicle types may also be loaned. Businesses can also take out car loans from financial institutions for purposes that serve their operations.

A car loan is a form of secure loan. That is, the loan is not granted based on the borrower’s trustworthiness alone. In the event that the borrower is unable to make the contractually stipulated payments, the creditor may repossess the vehicle itself as collateral. The will then be sold off to cover part or all of the account’s balance.

While conventional wisdom may suggest that paying for a vehicle on a cash basis saves you a lot of money, taking out a car loan offers a few distinct advantages of its own, specifically:

• MAINTAINING FINANCIAL FLEXIBILITY. By not paying in cash for the vehicle, you’re able to retain more money on hand which can be put to other uses. Unless you have a lot of money in your bank accounts, spending most of your liquid assets on a car is probably a bad idea. This is particularly true if you’re a businessman who needs funds ready for investment opportunities that come up regularly.
• INSTANT GRATIFICATION. For some people, the need to acquire a vehicle may come at a time when they can’t afford to pay cash for it. A growing family or a growing business can create a scenario where acquiring a car immediately is a must. For others, the idea of saving up for a car over the years seems like a daunting task. Most feel like they can never accomplish this feat because they can’t trust themselves to leave their own savings untouched. Whichever camp you’re in, a car loan can help you out by making the vehicle available to you within days or weeks.
• IT’S GOOD FOR YOUR CREDIT HISTORY. The Philippines may not have a credit scoring body like the ones that exist in the US just yet. However, that doesn’t mean local banks don’t share information on a person’s borrowing behavior for everyone’s reference. In fact, financial institutions have a good degree of visibility on how you perform on things such as credit card bills, loans and check payments which helps them make sound decisions on your requests to borrow money.Taking on a car loan and maintaining a good standing with it speaks volumes about your trustworthiness as a borrower. Banks see this and it helps them view you more favorably when it’s time for you to take on new and bigger loans for future projects.
• NO COLLATERAL REQUIRED. Compared to other loans, car loans have a greater degree of security for both the borrower and the creditor. For the borrower, the only collateral involved is the vehicle itself. In the worst case scenario of a default, the bank will simply repossess the vehicle but cannot legally take your other assets. For the bank, it can at least acquire the car and sell it to recoup some of its losses.

• THE LOANED AMOUNT. This is the selling price of the vehicle minus the down payment you agreed to pay up front. In effect, this is the total amount that you will be borrowing from the creditor and the amount that the creditor has the right to charge interest on.
• THE DOWN PAYMENT. This is the amount that you will be paying initially to the car seller. Typically, banks in the Philippines will require at least a 20% down payment. However, smaller down payments are sometimes allowed through promos. Some financing service providers also tend to allow “low down payment” arrangements where a borrower pays either a down payment of less than 20% or a small, fixed amount to start the loan process.
• THE INTEREST RATE. The interest rate is the amount charged by the creditor for lending you money. Interest rates in the Philippines are often stated on a per annum basis. This means that if a bank says the car loan interest rate is 6%, they mean that you will be charged 6% of the total loaned amount per year over the number of years you agreed to take the loan on.
• TERMS AND CONDITIONS. This refers to the rules and guidelines that will govern the car loan while it’s still in effect. This will state matters relating to the length of the contract term, registration, insurance, policies, payment, repossession, and so on.

CAR LOAN TYPES

Car loans come in various types depending on which institutions you get it from and what the condition of the vehicle you want to acquire is. Here are the most common types you can find in the Philippines:

According To Creditor

• BANK CAR LOAN. Banks are far and away the most popular lenders when it comes to car loans in the Philippines. Due to the strong demand for automobiles in the country, the car loan industry has become increasingly competitive over the years. This is good news for borrowers as banks constantly come up with ways to win over prospective borrowers from their peers.
• IN-HOUSE FINANCING. For people who prefer not to go directly to banks, getting the vehicle financed by the dealership is a viable alternative. The most popular example would be Toyota Financial Services which can act as a creditor for the company’s own vehicles independent of banks. In the Philippines, dealerships sometimes refer to financing services as being “in-house” despite the fact that a partner bank is really the institution that releases funds for the purchase of a vehicle. In arrangements like these, the dealership acts more like a preliminary processing body but the borrower ultimately has to pay to the bank.
• COMPANY-BACKED CAR LOAN. Large companies sometimes offer their employees car loan plans perks. In this type of loan, the company partners with a bank and the bank puts up the money for the acquisition of the vehicle. In return, the company acts as a guarantor while its employees receive preferred interest rates.
• COOPERATIVE CAR LOANS. In some cases, cooperatives can offer more favorable financing solutions for your automotive needs. However, most cooperatives will only lend you money if the vehicle will be used for business purposes. Not many cooperatives have the desire and the financial capability to issue car loans for personal use.

According To Car Condition

• BRAND NEW. The majority of car loans granted in the Philippines are for brand new vehicles. While brand new vehicles are more expensive than used ones, loans for them tend to have lower interest rates. This is due to the fact that the unit is theoretically fresh and has no issues when it rolls off the dealership, presenting fewer risks to the creditor.
• USED. Used vehicles may also be acquired via car loan. Generally, these cars will cost significantly less but will carry a higher interest rate. This is due to the inherent risk that banks and other creditors perceive with pre-owned automobiles.

If you’re trying to decide which one makes the most sense for you, here’s a list of advantages and disadvantages for each:

Bank Car Loan

PROS

• COMPETITIVE RATES. Banks generally offer the lowest rates when it comes to car loans as they have access to more sizable cash bases than their in-house financing counterparts. The typical interest rate in the country for a used car hovers around 6% but the figure can rise or fall significantly depending on the bank’s assessment of your qualifications. Interest rates may also rise and fall due to the country’s overall economic conditions as well as seasonality. The best rates tend to be available between the months of July to October when the monsoon season is in full effect and business slows down across the board.

• FREEBIES. Some banks offer services related to owning a vehicle such as insurance and special credit cards for use on gas and automobile maintenance. When you get a loan from them, they may throw in some of these as additional perks.
• PRE-APPROVAL FOR PREFERRED CLIENTS. If you’ve been doing business with the bank for a while now and you have a sizeable account with them along with a healthy credit record, the bank just might pre-approve a car loan for you. In cases like these, you’ll just need to sign off on some paperwork and acquire a vehicle of your choice without submitting a lot of requirements. This takes away all the hassles that come with the regular application process.

CONS

• STRINGENT APPROVAL REQUIREMENTS. Under normal circumstances, you’ll have to submit a fair bit of documentation in order to get a car loan approved by your bank. These may include proof of your capacity to pay, employment certificates, valid IDs, application forms and more. The bank will also be likely to contact your personal or professional references to inquire about your financial behavior with them.
• BIGGER DOWN PAYMENTS. Banks typically enforce conservative policies when it comes to down payments for car loans. The normal minimum down payment that a bank will accept is 20%, which is a substantial figure when a vehicle costs PhP 1,000,000 or more. This helps give the bank a greater sense of your financial capacity while giving your car dealership a substantial amount of money on hand before the vehicle is released.
• LONGER APPROVAL PROCESS. Typically, banks will claim that their approval windows take about 3-5 business days to complete. This claim isn’t necessarily false, but the car loan application needs to be submitted in the most ideal of circumstances for it to be approved on time. That means there has to be no long queue of applications for the bank, the paperwork needs to be perfect and your references have to pick up the phone when the bank’s credit department calls. If there’s anything amiss with these factors, you could be in for several days more of delays. Personal car loans are typically quicker to process than ones made under a business’ name. Additional documents such as business permits,. Board resolutions and income statements may be requested by a bank to ensure that the company borrowing money is financially healthy. Overall, a business-related car loan may take about a month to be processed successfully.

In-House Financing

PROS

• ONE-STOP SHOP. When you opt for in-house financing, you’ll enjoy the benefit of not having to deal with banks yourself and not having to prepare all the associated paperwork. Many dealerships have departments that can assist you with having your loan approved. This means that you’ll only have to interface with the dealership from the beginning of the sales process to the moment you drive home your car.
• LOWER DOWN PAYMENT OPTIONS. While banks generally require 20% down payments for every loan they approve, in-house financing bodies may allow 10%-15% payments up front for their vehicles to give the potential buyer the final push they need. In other cases, in-house creditors may put the down payment at a fixed amount such as PhP 30,000 while the rest of the car’s selling price is considered the loaned amount.
• FEWER APPROVAL REQUIREMENTS. In-house financing typically requires fewer documents and background checks to get approved. For the most part, all you need to present are valid IDs and proof of income. Bank statements may be requested from you but not every financing body will ask for it.
• FASTER APPROVAL. Since there are fewer documents to review, the approval process for in-house creditors is typically quicker. In some cases, it may take a day or two for you to find out if your loan application is approved or not.
• MORE PERKS. Since dealerships profit from your acquisition of a car more when you have them finance it, they often make more generous offers when it comes to perks and freebies. Some of the typical offers include free tints, free floor mats, free chattel mortgage, free seat covers, free labor on periodic maintenance services, and more.

CONS

• HIGHER INTEREST RATES. The trade-off for in-house financing on your car loan is the fact that the associated interest rates will be higher than those that banks charge. When you opt for in-house financing, expect for 6% to be the low end of the spectrum. Some in-house financing bodies charge as much as 10% interest per annum when you sign up with them.
• LONGER LOAN TERMS. In-house financing creditors usually require 5-year payment terms on the loans they approve. Since interest is quoted to you on a per-year basis, you can end up paying up to +50% of your car’s total selling price when it’s all said and done.

Overall, car loans from banks are a better option for people who are not in a situation where they urgently need to acquire a vehicle. For those who are struggling to secure loans from banks or can’t afford to wait days or weeks to get their vehicle released, in-house financing may be the way to go.

However, there’s a general process that most creditors follow. A few minor differences aside, this is what you can expect when you apply for a vehicle acquisition loan in this country:

• FIND A VEHICLE MODEL YOU LIKE. The first step in applying for a car loan is finding the exact vehicle that you would like to acquire. This may sound simple enough, but it can create a lot of dilemmas even for people who’ve purchased multiple vehicles in the past.For starters, you’ll want to determine the “make” or the brand of the car. Names like Honda, Toyota, Nissan and others come to mind among others. Next, you’ll want to determine the body type of the vehicle you want to take home. Are you looking for a sedan, a coupe, an SUV or a pick-up truck? Some car brands have multiple models per category such as Toyota which has the Innova and the Avanza in the AUV segment. Similarly, Ford has the Everest and the Explorer simultaneously in the midsize SUV class, making choices less straightforward for consumers than ever before.
  Lastly, you’ll have to decide which trim level of the vehicle you prefer. Some people like to go for the entry level tiers which have the least number of features but are also the cheapest. On the other hand, other buyers like more souped-up versions of the vehicle which inevitably cost more but will come with cool features such as leather interiors, touchscreen infotainment systems, more advanced safety features, and more.
• FIND THE BEST DEALERSHIP TO BUY FROM. Once you’ve determined the exact vehicle model and trim you desire, it’s time to do your due diligence in looking for the best dealership to acquire it from. Keep in mind that dealerships may carry the same brand, but the people who own the dealerships are likely not the same folks. That means there will be differences in pricing, policies and perks offered from dealer to dealer and it’s up to you to see which one offers the best deal.
• GET AN OFFICIAL QUOTE FROM THE DEALER. Once you’ve identified a seller whom you wish to buy the car from, you’ll want to get an official quote from them. This quote will likely be requested by the bank as proof that you’re borrowing the exact amount of money needed to make the vehicle purchase.
• LOOK FOR THE BANK WITH THE BEST DEAL. The next step is to choose the bank or other financial institutions to secure the loan from. Obviously, you’ll want to go with the bank that offers the best value for money. While lower interest rates will save you money in the long run, you’ll also want to consider the perks and freebies that the bank offers.
  Sometimes, creditors with slightly higher interest rates offer perks that will give them the edge in terms of overall value for money. Things like free insurance during your car’s first year, free chattel mortgage and free car accessories can more than make up for the higher interest rates.
• FILL OUT THE BANK’S APPLICATION FORM. After settling on a bank that you want to borrow from, pay them a visit and ask for an application form. Fill the form up honestly and submit it to the loans department officer.
• SUBMIT THE REQUIRED DOCUMENTS. The loans department officer will also give you a list of supporting documents for your application that you will need to submit in a subsequent visit. These will likely include:
  • Valid IDs (government issued)
  • The quote from the dealer
  • Certificate of employment (if employed)
  • Income Tax Return (ITR)
  • BIR from 2316
  • Proofs of billing
  • DTI registration if self-employed
  • 3-month bank statement
  • Latest GIS (for corporations)
  • Board resolution (For corporations)
  • Secretary’s certificate (For corporations)
  • Audited financial statement (For corporations)
• ANSWER THE VERIFICATION CALL. A day or two after the bank’s credit department starts processing your car loan application, a bank representative will call you to verify that you did apply to borrow funds for a vehicle acquisition. Answer some quick and easy questions and the application will be confirmed.
• WAIT PATIENTLY. The bank will now review your application form and documents. It will perform some more verifications. Wait for them to call again in case they need anything additional from you. Give them the entirety of the period that they claim is the processing time for car loan approvals. If that lapses and you don’t hear back from them, make a follow-up.
• ONCE APPROVED, SIGN THE CONTRACT. If all goes well, you should receive a text or a call from the creditor informing you of the loan’s status. Wait for them to set an appointment and drop by the bank when the time comes. You will be asked to sign a contract which you should read carefully and ask questions about before signing.
• COORDINATE WITH THE BANK AND THE DEALER. Once the contract is signed, you will have to wait for the bank to send the dealer a document called Authority to Deliver. That’s the final document necessary for the sales agent to get your vehicle released from their facility.
• DRIVE YOUR CAR HOME. A few signatures in the dealership facility aside, you’re all but finished with the application process. You should be able to drive your new car home very soon.

• AGE. Most banks have a minimum age requirement of 25 years for a person to be eligible for a loan. If a person is financially qualified but does not meet the age requirement, the bank will likely ask for an age-qualified co-maker to enter the loan with the individual. The co-maker will be legally responsible for the repayment of the loan in case repayment issues arise later.
• SOURCE OF INCOME. A bank must see a stable source of income on the part of a borrower in order for a loan to be approved. The person borrowing the money must not only have a qualified salary range but should also exhibit the ability to consistently earn the said amount over a long period of time.
• JOB TENURE. For employees, the number of years that they’ve worked in a company matters greatly. This indicates a person’s staying power in an organization and his ability to generate sustained income. Many banks prefer applicants with at least 3 years under their belts for a specific employer. This might be a little less for other creditors who are more lenient with this factor.
• BUSINESS STATUS. If the borrower is a corporation, the creditor will likely ask to see indicators of business performance. Your company’s audited income statement will be viewed along with your bank statement to see if your company’s cashflow is healthy enough to support a car loan.
• CREDIT RECORDS. Your individual or your company’s credit history will play a major part in the bank’s decision to approve or decline your car loan application. Unpaid credit card bills, bounced checks and defaults on other loans are very red flags for most creditors.
• EXISTING LOANS. Banks and other creditors will want to make sure that you’re not in over your head in debt, so they’ll check what other loans you are currently paying for. If the bank feels that your income can support your current loans along with the one you’re applying for, you’re more likely to get approval. Conversely, if your income looks like it’s near its limit in terms of handling your bills, you may get declined because of this factor.
• CRIMINAL RECORDS. Creditors will want to make sure that a person will have the capacity to repay them for the foreseeable future. If an applicant has a serious criminal history or significant cases filed against him, a bank might balk at the idea of lending the individual substantial amounts of money. After all, a person will find it difficult to make loan payments if he happens to get convicted while the loan term is in effect.
• TERMS OF LOAN. At the end of the day, creditors view loans as an investment which will generate profit through interest. If the bank deems the interest to be too small to warrant the investment, it may decline the proposed loan.
  This is particularly true for in-house financing bodies which take on greater risk from loans with very low down payments. These institutions mitigate risk by increasing their interest rates. If a borrower asks for a 1 or 2-year term, the creditor might decline the proposal because the account’s profitability will not justify the risks that the creditor will take on. More often than not, the creditor will offer a longer loan term so it can satisfy its own business goals.
• DOWN PAYMENT. Following the profitability logic from the previous point, the down payment that a borrower wishes to make may also be grounds for the disapproval of a loan application. Conservative lenders such as banks may decline a loan application of the down payment falls below what their policy requires. On the other hand, an in-house financing body may decline a loan application if the proposed down payment is too large, which reduces the creditor’s profitability.
  For banks, a down payment of less than 20% is usually not acceptable. For in-house financing bodies, a down payment of more than 30% will be subject to scrutiny.

Most car loans fall into the PhP 500,000-1,500,000 loan amount range. However, more affluent clients who wish to borrow multi-million peso sums for the purchase of luxury vehicles are also entertained by banks if they can prove that they have the financial capacity to make payments.

Since vehicles cost significant amounts of money, banks want to make sure they’re dealing with people who can stick to the agreement in the next several years. Here are some things you can do to give a potential creditor the right impression about you and your finances:

1. HAVE A STABLE AND LEGITIMATE INCOME SOURCE. Spending power is the primary factor in assessing a potential borrower’s ability to pay. The borrower needs to show that he or she has a sustainable income source that will cover living expenses plus the vehicle’s monthly amortization. The income source also needs to be legal and verifiable. Banks don’t usually want to deal with people who can’t explain how they generate significant sums of money each month.Having a lengthy tenure with a reputable employer while holding a decent position om the company are often viewed positively. Working for the government or being a highly paid professional (doctor, lawyer, engineer, etc.) also helps.
2. HAVE A HEALTHY BANK ACCOUNT HISTORY. Some people apply for loans thinking that all they need is to have a good amount of money in their bank accounts. While this is certainly viewed as a positive by many potential creditors, it doesn’t really paint a clear picture on the person’s financial status. Money can be withdrawn anytime from savings accounts, making it an unreliable indicator of a person’s ability to repay the lender.A healthy bank account should not just have money – it should have regular credits and debits that explain how the money in there was built up. A normal bank account doesn’t just get deposits with very few withdrawals. It also doesn’t receive one large deposit all of a sudden to grow to its current size. It needs to be built up with natural activity over the years to be perceived as healthy by banks and other creditors.
3. DON’T TAKE ON TOO MANY LOANS AT ONCE. Banks will calculate your declared income and run it against your current loans’ monthly dues along with your probable living expenses. This will allow them to estimate whether you can take on another loan or you’re putting yourself into a risky financial situation. Unless you have a large monthly income that you can prove to your potential creditor, try not to take on multiple loans at the same time.
4. PAY YOUR DEBTS ON TIME. A good credit standing is all about making the right payments on or before the due dates. If you’ve been able to keep payments within the agreed-upon time frame, you should be given the benefit of the doubt by banks and other lenders.
5. AVOID APPLYING AFTER SWITCHING JOBS. Creditors like seeing stability in the income sources of car loan applicants. If you’re planning to apply for a loan, try not to do it just when you moved from one employer to another. Many banks prefer borrowers who’ve been in their current workplaces for at least 3 years.
6. FILL OUT FORMS HONESTLY. Discrepancies in the information that you provide a creditor and what they find in their own investigations can be a deal breaker. To maximize your chances of getting your car loan approved, make sure everything you write in your application form is consistent with what your bank statements, credit records and references will show.

However, this is not always the case and the approval process can extend especially during busier months when the approval queues are longer. Banking holidays, difficulties in verifying your information and other internal factors may also make waiting times longer than expected.

Car loans applied in behalf of corporations tend to take significantly longer to approve. You can expect around 2 weeks of waiting on average. The document requirements tend to be more stringent and the background checks will be more thorough as the loan is attached to the name of a legal entity and not on individuals.

This means that the figure quoted to you is the amount of interest you pay per year with reference to the total amount loaned.

Borrowers often assume that the interest rate quoted to them is the total percentage of interest that they will have to pay the creditor in the entirety of the term. This is an inaccurate notion as the real formula to calculate the total interest for your loan is as follows:

Interest rate (per annum) x Term Duration (in years) = Total interest rate.

Applying the formula to a hypothetical scenario where a man borrows PhP 1,000,000.00 from a bank with an interest rate of 6% per annum over 5 years, we will get this computation:

Interest Rate: 6% per annum
Term Duration: 5 years
Total interest: 6% x 5 = 30%

Therefore, the total amount that the borrower will have to pay the bank within 5 years would be PhP 1,000,000.00 x 130% (1.30) = 1,300,000.00. The total debt will be split into 60 months, making the monthly amortization PhP 21,666.67.

Chattel mortgage, then, is the legal agreement between a creditor and a borrower which generally stipulates the terms of the loan. In the Philippines, car loan applicants often wonder about a line item identified as “chattel mortgage” in the list of items that they have to pay up front after their loan is approved.

Locally, the chattel mortgage charge refers to the legal documentation required for the borrower and creditor to enter a loan agreement. The cost of the chattel mortgage is usually shouldered by the borrower and its worth is usually in the tens of thousands of pesos depending on the vehicle’s price.

As the Philippine economy continues to improve, more and more people gain the desire to acquire vehicles. Banks are well aware of this and see a great opportunity to drive revenue from it. Here are some of the main ways that financial institutions profit from car loans:

• INTEREST. This is the main revenue driver for any loan. Depending on the terms of the loan, the borrower might pay 20%-50% of the total loaned amount.
• ADD-ONS. Many banks have either their own insurance business or they have third-party insurance firms that they’ve partnered with. When you sign up for a loan with the bank, you can expect them to enforce mandatory insurance policies from them or their partners until the vehicle is completely paid off.
• PARTNERSHIPS. Car dealerships in the Philippines that offer in-house financing often don’t really release the funds themselves for a vehicle’s purchase. Most of the time, they partner with banks who do the actual financing while the dealer simply acts as a processing agency. In this scenario, the bank usually allow more lenient approval procedures in exchange for higher interest rates.

The following are the most typical in the Philippine setting:

• OVER-THE-COUNTER PAYMENTS. This involves going to the bank on or before your due date and making cash payments with a human teller.
• CHECK DEPOSITS. If you prefer paying by check, banks also accept this method. Just make sure that the check is from the same bank if you’re paying on the due date itself. If not, you have to issue the check 3 days in advance to account for clearing periods.
• DIRECT DEBIT. If you have a savings or checking account with the bank where you got the loan from, you can sign a document authorizing the bank to debit funds from your account automatically when the due date arrives.

Paying your monthly amortization bills on time is of the utmost importance. Penalties may apply in case payments are missed. The amount will depend on your contract with your creditor.

A series of events will likely happen in this sequence should this occur:

1. You will receive a call and/or a text message from your creditor reminding you to settle your payment.
2. Depending on your contract, you will be charged a penalty for missing your car loan payment. The usual penalty is 5% of your monthly amortization per day. The more days you miss the payment by, heftier your penalty fees get. Legally, these penalties are stipulated in your car loan contract as a form of compensation for damages to your creditor.
3. You will be given a grace period of 2-3 months to settle your dues. If not, the creditor will repossess the vehicle. Repossession may be done by private agents employed by the creditor but the sheriff from a court may also be asked by the creditor for assistance in the recovery of the car.
4. The vehicle will then be sold off via public auction or through listings on its website and within its facility.

Note that all previous payments to the creditor are forfeited when a vehicle is repossessed. Additionally, the creditor can no longer demand your loan payments once the vehicle has been repossessed. While this may not seem so bad, things will eventually get worse for your financial life should your loaned car be repossessed.

Your credit standing will be severely damaged if you default on your car payments. When this happens, applications for future loans will become very hard to approve for lenders. Even access to other financial products such as credit cards and checks may become more difficult to get just because your trustworthiness in the eyes of financial institutions has been compromised.