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The First-Time Buyer's Guide To Car Loans

New to buying a car? Here's everything you need to know!
PHOTO: Ben Goldstein

Purchasing your first car is a rite of passage into adulthood. But what if you can’t afford to spend your entire life savings on a car? Nowadays, it’s easier than ever to get an auto loan from a bank.

Although car dealers also offer auto loans, it’s usually best to stick with a bank, especially one you already have a relationship with. Most dealers charge a higher interest rate since they serve as the middleman between you and the bank. Plus, they earn commission from the transaction. You still might want to check out promos and freebies from the dealer, but don’t forget to watch out for hidden charges.

For first-time car buyers, here’s a guide on how to apply for an auto loan from a bank.

Can you afford a car loan now?

The typical requirements for a car loan applicant in the Philippines are the following:

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  • You need to be at least 21 years old and no older than 65 years old upon loan maturity.
  • You must have a minimum monthly household or family income (from P30,000 to P50,000).
  • You have to be a resident of the Philippines; for OFWs, the beneficiary has to be a resident of the Philippines.
  • You have to be a regular employee for at least two years.
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Once you’re sure you meet the minimum requirements, it’s time to crunch those numbers. Make a budget of income and expenses, with wiggle room for emergencies. Be as honest and realistic as possible now before making the financial commitment to take on an auto loan. You should end up with an estimate of how much you can spare for your car loan. And remember that number!

Your credit score will also play a part in whether you will be approved for a car loan. If you’re multiple payments behind on your credit card bill, the bank won’t be as willing to give you a loan for a car—and for your own good, too. Try taking online pre-approval tests to gauge your chances for approval.

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Picture the dream car you can afford.

Now comes the fun part. Make a checklist of all your wants and needs, the negotiables and non-negotiables. Do you want a new or used car? What about fuel efficiency? Do you need a roomy SUV or is a sedan big enough for you? What brand of car do you want? Consider all these factors as you research what type of car is best for you. Don’t get too attached, though; have a list of top choices of cars in case things don’t work out. Keep your dream car grounded in the reality of the budget you computed earlier, and make sure to leave space in your budget for the other necessary costs of car ownership: insurance, registration, chattel mortgage fees, maintenance, repairs, and gas expenses.

Design the optimal structure for your auto loan.

Online auto loan calculators on bank websites are an easy way of tweaking the many factors that affect the overall cost of your auto loan. Although they only provide a rough estimate and the bank’s actual offer comes after you submit your loan application, they’re useful in structuring your loan to minimize costs and as a starting point in comparing auto loans among banks.

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Listed below are the key features of an auto loan you can input in an online calculator. Each decision has a corresponding trade-off, so choose wisely!

  • Loanable amount and down payment  For banks, the minimum down payment for a brand new car is 20% while a used car is usually 25% to 30%. Although lower down payment means less cash paid upfront, paying a higher down payment will save you money in the long run. A higher down payment means fewer amounts financed—you borrow less from the bank—and save on interest expenses!
  • Payment terms - This is the duration of your loan. For new cars, the terms range from 12 to 72 months while for used cars the range is 12 to 48 months (depending on the age of the car). The shorter the length of the loan, the less interest you will be charged.

After inputting the factors, the loan calculator will generate a resulting monthly amortization. This refers to the fixed amount you agree to pay the bank every month up to the end of your loan term. It’s a combination of paying off your debt and interest at the same time. The amount of your monthly payments is affected by your down payment and length of the loan. Although a shorter term saves you on interest, your higher monthly payments may strain your household budget. Paying a higher down payment can lower your monthly payments.

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All in all, it’s important to find the optimal loan structure that doesn’t strain your cash flow or burdens you with excessive interest.

Compute and compare offers among banks.

After playing around with the auto loan calculator, you’ll have eventually found the ideal structure for your loan. Now’s the time to research and compare which bank offers you the best deal given your chosen loanable amount, down payment, and payment terms. 

To figure out which is the best offer, try this: multiply the monthly payment by the payment terms and add the down payment to arrive at the total amount paid for the car. Then get the difference between that and the selling price of the new car (or appraised value for a used car). That’s how much more you’re paying in interest compared to if you just bought the car with cash today. You can take it a step further and divide that amount by the loanable amount. That’s your interest rate over the loan term. You can use either the interest amount or rate in comparing different bank offers, whichever works better for you. Just make sure you’re comparing loans with the inputs or it won’t make sense. 

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Here’s an example: an auto loan with monthly payment of P20,000 multiplied by 36 months equals P720,000. Add that to the down payment of P154,533 to arrive at the total amount paid of P874,533. Deduct the selling price of P772,665 from the total amount paid to arrive at an interest premium of P101,868. This interest divided by the amount borrowed of P618,132 will give you an interest rate of 16.50% over 36 months. 

Try to save on other costs, too.

Chattel mortgage fee, insurance, and LTO registration are all other costs of an auto loan. Some banks may offer services in acquiring insurance and registration, but you can usually save money by doing these on your own. Chattel mortgage fee and penalties such as collection fee and late payment interest may differ among banks so it’s best to shop around. 

Chattel mortgage fee is what you pay the bank in exchange for getting a secured loan. Most auto loans in the Philippines are secured, meaning that in case you miss a certain number of monthly payments, the bank has the right to repossess your car. The advantage of a secured loan is the bank can offer you a lower interest rate since it lowers their risk. 

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Apply at your chosen bank and submit the necessary documents. 

After comparing offers from banks, apply at your chosen bank by submitting the necessary requirements which can usually be found on its official website.

In general, documents needed are the following:

  • An accomplished application form
  • One to two valid IDs or a copy of your IDs
  • Income documents depending on your employment status (employed locally, abroad or self-employed) with additional requirements for foreigners 

Processing time is usually within one banking day so you’ll know whether you’re approved or not ASAP. Additional documents are usually submitted after approval.

Choose the most convenient payment plan for you.

Once you’ve been approved for a loan and you’ve finalized the paperwork, all that’s left is to sign and decide how you’re going to pay. To ensure you pay your monthly amortization regularly and on time, the bank will offer you several options on how to repay your loan. Auto Debit Arrangement (ADA) works best if you already have an existing account with the bank. It deducts the monthly amortization directly from your account so you don’t have to worry about missing a payment. Paying through post-dated checks works the same way. Other options such as over the counter, mobile banking, and money remittance require more responsibility. Make sure to keep your own record of your payment schedule so you know how many payments you have left on your loan—soon, your dream car will be completely yours!

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Sources: TopGear,, Carmudi, My Financial Coach

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