Car Loan in the Philippines – A Detailed Guide on How to get one

For many, buying a car is one of the biggest financial investments one would ever have to make. However, getting enough money to obtain your dream car in the Philippines can be quite a financial burden. Not everyone can afford to process a one-time payment for a car. Fortunately, financing options such as car loans have made it possible for buyers to own a car without paying for it fully in cash. The auto loan companies are capable and willing to lend you the money you need for your dream car, provided that you oblige with their loaning provisions.

What is a Car Loan?

A car loan, popularly known as an auto loan, is a type of loan borrowed by an individual or institution with the aim of buying a car. Essentially, the borrower enters into a contract or agreement with the lender to use the money given to pay for a vehicle. Usually, the purchased vehicle becomes the security against which the car loan is secured. This means that defaulting on the loan repayments expressly allows the lender to seize it to recover the auto loan.

Repayment of auto loans is made in installments, usually fixed, throughout the loan term. The car loan industry in the Philippines has grown tremendously, becoming one of the largest contributors to the consumer credit markets in the country. This means that more people are going for car loans to finance their vehicle investments.

How Does It Work?

Like most simple interest loans, a car loan is repaid in monthly installments as a sum total of the principal (money lent) and the interest rate (loan cost). The borrowed amount is spread out into a series of specified amounts throughout equal time intervals. When the time intervals fall within months, the distribution of these installments is known as monthly amortization. Some auto loans work like lease contracts, where the buyer becomes the full owner of the car after paying out the installments in full.

You are eligible for a car loan in the Philippines if you are aged 21 to 65 years. Your employment status must also show at least 2 years of active engagement with your current employer. Additionally, depending on the financier, you may need to show proof of gross monthly income of not less than 30,000 to 50,000 Pesos.

To determine the loan term and interest rate that best suit your loan needs, you might want to do your analysis using a verified auto loan calculator. An auto loan calculator considers all essential factors, such as interest rate, loan term, down payment, and the car price, to establish your monthly amortization.

Advantages and Disadvantages of Taking a Car Loan

Here are some of the advantages of taking a car loan in the Philippines.

Own a Brand New Car without paying for it in advance – The most obvious advantage of taking a car loan is that you get to own and drive your dream car without having to pay cash upfront.
Availability of Established Financiers – Most auto loans are sourced from banks and financial institutions that have been in the business for decades. By identifying a reputable lender with a good track record of successfully giving out multiple loans, borrowers are guaranteed to profit from a car loan.
Improved Credit History – A car loan is a great way to build on your credit standing. Repaying the monthly amortization in good time will help improve your credit score, which is good for future financing requirements.

Of course, we do not live in a perfect world, and getting a car loan has its disadvantages too. Here are some of them.

Depreciation – The biggest setback of buying your dream car using an auto loan is that your car will depreciate throughout the loan term. This means that by the time you are settling the loan fully, the value of the car will have depreciated below the initial buying price in large numbers.
Interest Rate and Other Costs – Reaching the loan maturity date can be exciting. However, by this time, the initial selling price of the same car will only be a fraction of the total amount you will have paid by the end of the loan term. This is because the interest rates and related auto loan costs can be exaggeratingly expensive sometimes.

Interest Rates – What to Expect

Interest rates for auto loans are expressed as a yearly rate in what is known as the Annual Percentage Rate (APR). APRs vary with different lenders, but other factors such as your credit score may have an implication on the APR you attract. On average, APRs range from as low as 4% to as high as 20%. You might need an auto loan calculator to compare APRs before settling with a financier.

Rates Offered by Banks

Making a car loan application with a bank should earn you a lower interest rate than what the car dealership offers. Often, a bank will net you up to 4 to 5% lower than dealership financing. This is because, while banks lend you money directly, dealerships will partner with banks and other financiers to process your car loan.

Different banks in the Philippines offer varying rates for auto loans. However, you are at an advantage if you are buying a brand new car or a vehicle not older than five years. For example, a brand new car in EastWest Bank nets an interest rate of 5.99%, while a second-hand vehicle is capped at 7.19%

Rates Offered by Nonbank Financial Institution

Auto loan interest rates in banking institutions are determined by various regulations as outlined by the Securities and Exchange Commission and the Insurance Commission. On the other hand, non-bank institutions are quite flexible when it comes to interest rates. They apply prime lending rates to determine an auto loan interest rate. This explains why banks tend to offer lower interest rates than non-bank financial institutions.

For instance, while a bank may charge a 7% interest rate on a car loan, a non-bank financial institution would be rating 1.5% higher.

Application Process – What Documents Do You Need to Provide

To ensure a smooth loan application process in the Philippines, here is a run-through of the requirements and basic steps that you must follow.

Step 1

Check Your Car Loan Eligibility

The loan process cannot be valid if you are not 21 years old and above (and below 65 years by the maturity date) and a Filipino (or with Filipino co-borrowers). You must also show proof of monthly income and the latest income tax return.

Step 2

Decide on the Car That You Want

Identifying the car you want determines how much you want to borrow. Use an auto loan calculator to ascertain your borrowing budget.

Step 3

Identify Potential Lenders and Compare Loans

The list of auto loan lenders in the Philippines is endless. After assessing your loan needs using an auto loan calculator, it is time to undertake a thorough background check to identify the best loan term and the ideal lender.

Step 4

Complete Car Loan Requirements

Most auto loan lenders will require the following documents to approve your loan application.

Valid Government Identification, such as ID Card, Passport, Driver’s License, etc.
Proof of Employment (for the employed), such as bank statements, income tax return, and a pay slip.
Proof of Business Registration, such as latest income tax return, financial statements, business permit, etc.
Proof of Remittance (for Overseas Filipino Worker), such as income tax return and certificate of employment.

Step 5

Submit Your Loan Application

Depending on the lending policies of your financier, you can complete your application online or by visiting the institution.

What to Do If Your Application Is Rejected

It is normal for a loan application to get rejected. The first thing you need to do if that happens is to identify the reason for the disapproval. Several reasons a loan application can be rejected include a large auto loan request, poor credit scores, lack of a stable income, and unclear or incorrect information.

The good news is that you can always reapply for a loan. Go through your application to verify the reason for your disapproval, correct the error, and reapply. For instance, if you did not submit an income tax return or a bank statement as required, you may have to resubmit them to get approved. Again, there are other financing options that you can explore to acquire a car loan.

FAQ

Can I use a personal loan to buy a car?

Preferably, an auto loan is the best option when buying private vehicles. However, there is no restriction on how you can use a personal loan. So ideally, you can buy your dream car using a personal loan.

How old do I need to be to get a car loan?

To get a car loan in the Philippines, you must have attained the age of 21 years. However, you must not exceed 65 years of age when the loan term expires.

Will I get a car loan if I have a bad credit score?

In most cases, banks and non-bank financial institutions will not reject your loan application if you have a bad credit score. However, a poor credit rating attracts more fees and higher interest rates. Some institutions may also require you to pay a larger down payment to get the loan.

How can I be sure that my loan application will not be rejected?

To reduce your chances of getting your loan application rejected, you must always ensure that your credit remains good. Additionally, confirm that you have all the necessary documents when making the application, including identification documents, the latest income tax return, bank statements, and proof of residence.

Can I use the loan to buy a used car?

You can use an auto loan to purchase a used car. However, personal loans are a better option for used cars, especially if you are buying a vehicle from a private seller. You enjoy the benefit of having the money at hand even before selecting the car you want.