Don’t sign that car loan deal just yet. It may cost you thousands of pesos more than it should.
According to a study by car comparison site Lamudi, car sales in the Philippines reached record highs in 2015. The automobile industry broke records when it sold 62,882 vehicles within the first quarter. This is said to be an effect of economic progress, evident in the growth of the middle class. Affordable price packages with lower down payment offerings, coupled with attractive consumer vehicle and car loan programs from banks and financing companies drove demand for passenger cars and commercial vehicles. This resulted to a 26% increase in auto loans, amounting to P244.61 billion.
Chances are, you’re also wanting to buy your first car, or upgrade the one you’ve had for a decade. You’ve researched on different models, their market price and features, particularly their fuel economy. You’ve saved up enough for the down payment. You’ve even gone to the dealership and gotten a financing offer.
Before you sign any contract, you have to realize two things. One, your car dealer does not finance car loans – it only acts as a middleman, endorsing you to a bank or financing company, and in a few cases the car manufacturer’s financing arm. Two, your dealer does not specialize in car loans, which is seen as more of a requirement for you to buy the car, if not an opportunity to make more money out of your transaction.
We’ve outlined the following top 5 reasons why you should say no to your first car loan offer from the dealership:
1. High-Interest Car Loan
As mentioned, car dealers don’t finance your car loan themselves but work with partner banks and financing companies, or the car manufacturer’s financing arm. Because of this, they are also looking at making a profit out of processing your car loan through a mark-up in the form of a higher interest rate. In general, dealers offer yearly interest rates of 9% to 10%, while banks’ car loan interest rates only range from 5% to 10% per year. That means you can be paying double what you should for the same car.
2. Unwanted Bundles
Some dealers can also increase your car’s cost by bundling products and services you did not ask for or want with the car loan, such as extended warranties and insurance. What makes this possible is the fact that some car buyers only focus on the monthly payment instead of the actual price. Make sure to read the car pricing breakdown to catch any unwanted items inserted into the deal.
3. High-Profit Car Loan
Lenders offer varying commission schemes to car dealers for car loans endorsed to them. Because they stand to make profit with your car loan, some dealers will give you car loan offers that will net them the highest profit, instead of one that has the best interest rate. For example, although you may have qualified for a car loan at a 5% interest per annum, they might offer you one at a 6% interest because that financing company offers a higher percentage as commission.
4. Lender Incentives
Some lenders can offer incentives to dealers that can meet the quota of car loans generated. This means that more often than not, your dealer will send you to lenders where they stand to gain something in return. Keep in mind that your dealer has no obligation whatsoever to offer you the best car loan.
5. Buying a More Expensive Car
Say you go into the dealership looking at a car worth P500,000. After a 20% down payment of P100,000, you are looking at a P488,000 total car loan, at 5.5% yearly interest with a payment term of 48 months (P400,000 principal or loan amount + P88,000 total interest). Your monthly payment will be P10,167. Your car dealer may try to upsell you to a car worth P700,000 to P800,000 instead by offering a lower down payment and longer payment term of 60 months. Although your monthly payment may be around the same, not only will you be buying a car that’s beyond your budget, you are paying a higher amount of interest the longer your payment term is.
So how do you get the best car loan based on your budget?
Simple: shop around for car loans. Don’t rely on the dealer, who has a greater interest in selling you a car than getting you a fair car loan. Go to banks and financing companies directly, to see which car loans you qualify for and compare each offer.
Don’t have the time or resources to shop around for the best car loans? Loansolutions, the Philippines’ #1 Loans Marketplace, is here. Our 3-Step Online Loan Application is cross-referenced with the criteria of top banks and lenders in the country, to make sure that we find lowest interest car loans that you can qualify for. A dedicated Loansolutions Concierge will contact you to answer all your loan questions, and help review and submit the required documents to banks and lenders on your behalf. Because we stand against predatory lending, we only work with the biggest network of legitimate lenders in the Philippines.