Car Loans - What You Need To know

Car Loans - What You Need To know  The questions and decision points when taking out a car loan.
Thinking of buying a car? Or know someone who is? Then this article is for you.

My article on car loan rates is one of the most popular articles on this blog. And consequently I got asked a lot of questions about car loans in general. So I thought it would be useful to post everything I know and learned here.

So here's some of the usual questions and decision points I encountered.


Second-hand Or Brand New?


This one is pretty much up to you. But in general, if you don't know much about cars and don't know someone who can help, brand new might be best.

If you want to save money, second-hand is better. And if you aren't too picky, cars repossessed and auctioned off by banks are the best. Whichever of the two you choose, make sure you are getting it in decent condition.

Dealer or Bank financing?


Always go with bank financing if it's an option. Financing through the dealer is always more expensive compared to a competitive bank. Just do your due diligence and shop around for the bank with the lowest interest rate.

The lowest loan interest rate will usually result in the most affordable loan.

My bank won't let me know their rate until I get pre-approved. What do I do?

No problem. Getting you approved for a loan is pretty much just a background check on you and your credit history. You can get pre-approved and decide not to continue with their loan - especially if another bank is offering better terms.

The bank says I need to have an account with them. What do I do?

If you will be loaning from them, yes. If you are just getting pre-approved for a loan, you can hold off until you know you will actually loan from them.

What about Dealer discounts and freebies?


Another good way to lessen the cost of the car (and hence the loan). Just as you canvassed different banks for the best loan, you can canvass different dealers.

For the exact same car, different car dealerships can offer different incentives. They typically give free LTO Registration and car seat covers (the "ordinary" cloth kind). Usually they also can offer free accessories like car cover or early warning device. They might even offer free first-year car insurance.

But what you really want is for them to take a certain amount off the car's price. You can try to negotiate for this and even try to play one dealership against another if you want. Personally  I didn't go that far, but as "leverage" I did mention that without a discount I'll just buy from another dealer that's nearer to me.

However, for really new models (i.e. it just came out this month or last month), it's almost impossible to get a discount.

Car Loans - What You Need To know  The questions and decision points when taking out a car loan.
What about Bank promos?


Similar to dealers, different banks will offer different promos. However, different branches of the same bank will offer the same loan terms. (The sole possible exception is when you're really close with the branch manager. Maybe)

They can also offer car-insurance free for the first year but locked in to that insurer for the next few years. They might also lower the cost of Chattel Mortgage as a promo. But, in my opinion, the best promo is when they offer lower interest rates. Interest makes up a large portion of what you will be paying over the years. Getting a 1% lower interest rate can make a world of difference.

How can I lower the down-payment? 


Usually, you can get a lower required down-payment when the dealer offers it as a promo.

In some cases, banks may also offer lower down-payment as a promo. You might also be able to negotiate a lower down-payment with the bank. However, they often times do not approve that. But it never hurts to ask.

A word of caution though: A lower down-payment usually means you will end up paying more in interest.

What's the deal with Chattel Mortgage?


Chattel mortgage is an upfront expense you have to pay when taking out a car loan. It's basically payment to use an asset you haven't paid for yet (at least not completely).

It can be a big expense. It's usually a bit higher than your expected monthly payment, although it can sometimes be considerably more. It's a factor, since it's paid upfront. But over the long-term it's not as big a concern as the interest rate.

AOR or OMA?


AOR means your first monthly payment is due 1 month after paying for and getting the car.

OMA - one month advance - means your first monthly payment is due the same time as you pay the down-payment at the bank. But the next monthly payment is still due one month after getting the car. (Because you can pay on a Monday at the bank next door, but get the car on Saturday from the dealer that's a hundred kilometers away).

AOR allows you to have a lower initial cash out. OMA let's you have a lower monthly payment. Overall, you might save a little more money by going with OMA.

Can I choose my amortization date?


It's convenient when your bills coincide with your payroll. Yes, it's a bummer when money just passes through your hands. But at least you don't risk forgetting to pay or mistakenly spending the money meant for bills. Specially when those bills are for banks that charge stiff penalties.

Some banks may outright let you choose your "due date". But even if they don't you should bring up your concern, because all banks can at least help you time it. Just approach your bank with your concern (before finalizing the loan, of course).

Most of the time the first payment is due one month after you get the car from the dealer. So if you buy the car roughly one month before your desired due date, you should be set. Again, make sure the bank knows before executing any plan, if a specific due date is important to you.

Car insurance!


You're required to have comprehensive insurance (but having an Acts of God/Nature clause is typically not required). 

You have three options:
  • Insurance form the dealer's affiliate
  • Insurance form the bank's affiliate
  • Canvass your own.

Banks typically offer insurance only as promos. It's usually free for the first year but you are locked in for the duration of the car loan. As relayed to me, after the first year, the insurance premium is higher in the succeeding years than a competitive offer from another insurer.

(However, since the first years cost nothing, it could possibly be a wash/tie between the most competitive offers and the promo-lock-in. Can't really say for sure though.)

Dealers usually have an affiliate insurer; that's just good business on their part. This is the most convenient option since the dealership/agent can arrange everything for you.

Canvassing your own insurance takes the most effort, but it could also save you the most money among the three options. Just be sure to canvass a lot of insurers to ensure you get the best possible offer.

After-the-fact expenses:


Maintenance Costs


This is around 6-10k+ per year, even for brand new cars. Oil change, filters, etc. That number is for a brand new car at the manufacturer's official service centers.

You can save more if you know a trusted mechanic and have him do the maintenance.

Second-hand cars probably cost more to maintain.

Car Loans - What You Need To know  The questions and decision points when taking out a car loan.
Warranty (For brand new cars)


Typically warranties do not cover anything that's due to wear and tear. Your warranty will also be void if you do not bring in your car to an official service center for the periodic maintenance.

While your car is still under warranty, you'll have to weigh the savings of bringing it to a mechanic versus the possible cost of repair if something fails and you have a voided warranty.

Insurance renewal


Car insurance is typically renewed yearly, except when you get locked in due to a promo. Maybe you could also renew for multiple years instead of just one, though I've never tried.

And obviously, the more expensive the car you buy the more expensive the insurance is.

The cost also typically goes down after the first year, primarily because the value of your car has depreciated.

LTO Registration


Like car insurance, it also gets more expensive when you buy an expensive car. But it typically costs a few thousand.

The LTO website used to have a table of fees and charges, but I can't find it on their site anymore.

Loan Penalties


Like all loans, if you don't pay on time you get charged additional penalties. Each day of missed payment can already incur a cost. This can vary from bank to bank however, and it's best to clarify this with them.

One bank I know will give you a "grace period" of 11 days, during which it won't impose penalties. But on the 12th day and you still haven't paid the amortization you get charged a penalty for the whole 12 days.

Embarrassingly enough It happened to me. I missed by a few weeks or almost a month. The total "extra" charge was thankfully just a few hundred.


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3 comments:

  1. Owning a car is no joke. Dapat talaga pinag-iisipan at pinaghahandaan mabuti. Andaming gastos. Those are great tips!

    My husband and I went for a brand new car before. Matatapos na kami sa pagbayad next year kaya excited na kami! If ever we'd be buying a bigger car, we'll go the brand new route pa rin para less stress and hassles (based from experience). :)

    ReplyDelete
    Replies
    1. Hi edelweiza!

      Yep, definitely a big cost. And yeah; my wife and I went with brand new as well for the same reason.

      Delete
  2. Thank you so much for this incredible and amazing tips. It really helped me make a decision since I am having second thought about getting a car loan. This article really helped me out a lot. Looking froward to more articles from you. This blog post is thought-provoking and I am pleased scanning about this kind of information. Hot news like fashion, relationships, how to get a car loan, buying a house and even online shopping are unfailingly informative and I definitely recommend checking out this type of news. Thank you for the information!

    ReplyDelete