Getting a car through financing

Breaking down downpayment and costs

So you really like the Toyota Corolla Cross, MG ZS Turbo, or any of the other crossovers that were launched in the past few months? Granted the full price may seem steep, however the financing options seem far more affordable. Can you really afford it? We offer some tips and breakdown all of the confusing terms to make it easy to understand.

Work out a budget

Conventional wisdom dictates that you should only allot 10%-20% of your gross monthly income for auto payments. That way, you have flexibility to either save money for the future, pay for vacations or to allow you the occasional shopping spree. You can push it a little higher but understand that you’ll be giving up your daily Starbucks, weekly dinner dates, etc. in order to afford the vehicle. Also, be responsible enough to know that car payments still shouldn’t eat up the budget for daily essentials and, more importantly, the monthly bills.

Experts on the matter say that to get approved for a bank loan, the monthly amortization of the vehicle you intend to buy should not exceed 30%-40% of your salary, otherwise you’ll almost surely get disapproved.

As such, allot 10% -20% of your salary for the monthly amortization and choose a vehicle based on that budget only. This way, your loan gets approved and you don’t give up the lifestyle you’re accustomed to.

Study the pitch

The two most popular ways of acquiring a brand new vehicle is to buy direct from an auto dealer or go to a bank and get yourself a PO (purchase order).

If you’re not financially liquid, or in other words, don’t have enough to pay for the 20% downpayment, your friendly neighborhood auto dealer is your best bet.

They offer ‘low downpayment’ packages, but remember that it comes with a standard add-on rate that is non-negotiable and it hovers at around 50% for five years. If you know nothing of interest rates, that number is high.

Chattel mortgage (price higher at the dealer by about Php 2,000 to 3,000), insurance and vehicle registration are subsidized by the dealer but while it may seem easy on the pocket, remember the add-on rate that you’ll have to bear for 60 months.

Getting a bank PO (purchase order) is the more cost-effective way in the long term – more about that below – but you’ll need to put down a significant amount for downpayment, say 20% at least.

What makes this option more economical is the add-on rate for the duration of your auto loan. It’s different between banks and also depends on your relationship with the bank. If you’ve been a loyal patron and know the manager personally, you can haggle the rate down to as low as 24%. That’s more than half of what the dealer offers. You can also negotiate the price of chattel mortgage and insurance, and maybe even spread out the payment over a certain period.

By the way, don’t bother haggling for freebies like slip-free mats, tint or chattel mortgage. One-price policies by most automakers in the country have patched this loophole up. They lowered the downpayment so you can use the money you saved for all that extra stuff.

Ownership costs

Let’s say the monthly amortization is easily covered by 10% of your salary, the ugly truth is, that’s the least of your worries. Warranties of brand new vehicles will save you money but it only covers major components that break down due what automakers call ‘material fault.’ Oil changes and the consumable parts up for replacement like brake pads, air cleaners, oil filter, etc. will be out of pocket and if we’re talking about repairs caused by accidents and crashes, that could go from the thousands to hundreds of thousands depending on the damage.

Then, there’s insurance. Philippine law mandates auto owners to purchase TPL or third-party liability insurance only, comprehensive is optional. Though more costly, comprehensive coverage gets your insurance company to do all of the paperwork and legwork to either get you physically back on your feet or get your vehicle back on the road.

Last, but definitely not the least, parking. It may seem like an inconsequential expense but aside from paying a hefty fine if you’re towed for being an ‘obstruction’ on the road, parking rates in CBDs almost rival two-star hotel rooms. Factor this in before even thinking of buying a car.

For an average sedan, you’re looking at some P180,000 for the car’s periodic maintenance service (PMS), fuel costs, insurance, parking and monthly amortization, and that’s just in the first year of ownership.

The older your vehicle gets, the more care it needs. After the first two years, you’ll need a new battery (around P4,000), swap the front tires for a new pair (roughly P4,000 each) and new brake pads (P5,000 each and you’ll need the two per wheel). Three years and beyond, you’ll have to pay for vehicle registration, which is about P4,500 per annum, plus the pricey TLC (tender loving and care, like carwashes, waxes, detailing) it will require.

Co-maker

If your salary does not reflect the amount required for the loan, get yourself a co-maker. This could be a wife, parent or even a friend. A co-maker in legalese is someone who lends his credit by joining in the principal debtor’s obligation, so as to render himself directly and primarily responsible with the principal debtor. In other words, you’re telling the bank that’ll you’ll pay the car loan if the borrower doesn’t, but you don’t get to take home the vehicle.

Spouses are automatically co-makers of their significant other; banks require this arrangement. If legally separated, a waiver is necessary before the loan can be processed.

There are many new vehicles and many tempting deals as auto manufacturers are also eager to push inventory. But during these unstable times, we all have to be smart. Like I tell my kid, get it only if it’s a need and not a want.