Loans are one of quickest ways for individuals to procure finances for different purposes such as purchasing homes, cars or even to fund vacations, home renovation, to pay overdue credit card bills and so on. There are different types of loans that cater to set purposes such as home loans and auto loans that cater exclusively to those looking to purchase or build houses and to procure cars and other vehicles respectively. Additionally, customers can also avail personal loans that can be used for a variety of purposes. Certain loans usually require the presence of an additional collateral or security.
Car loans are one of the most sought after financing options that customers choose when they want to purchase a car and cannot pay for the same in one lump sum amount. Paying for a vehicle by cash has a lot of advantages although customers may suffer from ‘cash separation anxiety’ for a while. By paying cash, customers need not have to worry about interest rates or additional payments to be made which would be the situation if he/she would have opted for car financing. However, most cannot afford to follow this method of payment, hence they choose to go for car financing.
Car loans, Hire purchase, Personal Contract Hire and Personal Contact Purchase are some of the common methods of car finance that is available and amongst the above, car loans are the most sought after option. This is because of the convenience of receiving immediate financing and it enables customers to have immediate ownership of the car. Also, customers procure car loans prior to purchasing their dream set of wheels therefore a budget will be fixed prior to purchasing the car itself. Interest rates and tenure of the loan will be decided by the bank based on the amount required and also the repayment capacity of the borrower. Customers need to remember that loans are provided more easily and at competitive interest rates by banks and financial institutions to those customers who have a good credit report and score .i.e those that are not considered to be risky by banks in terms of loan repayment. Hence customers are advised to check their credit reports from time to time and ensure that they maintain high credit scores.
Other popular methods used to finance cars are through mortgage financing which can be via car lease agreement or chattel mortgage. Car lease agreements are financing options wherein the employer of the customer acts as the financier and a part of the value is subsidized by the employer or the company and the rest has to be paid by the customer at a nominal interest rate.
What is a chattel mortgage?
Chattel mortgage refers to the practise wherein the bank provides the purchase amount to the customer and he/she procures the car which is the chattel. A mortgage is then taken by the bank over the car as collateral for the loan and an interest rate is also applied. Chattel refers to movable property. Once the customer repays the loan completely along with interest rate, then the ownership of the vehicle is automatically transferred back to the owner(which was with the bank so far) and the mortgage is cancelled.
Some of the features of this type of a loan is -
- The contract terms are negotiable and flexible with terms that generally range from 2 years to 5 years.
- The mortgage interest rate and the monthly mortgage amortization is fixed.
- Customers have the option of making mortgage deposit which is either in cash or a trade-in.
- In case the vehicle is used for the business or company purpose then customers can avail a deduction in tax.
- Customers can also avail a myriad of balloon or residual value options which usually vary from 0% to 60%. This value is based on the kind of vehicle and also if it is brand new or used.
- In case the customer is registered for GST, then input tax credits are also available.
- Customers can enjoy the benefit of reduced interest rate as chattel mortgage is secured against the car.
There are many banks and lending companies that provide car loans based on chattel mortgage to citizens within the Philippines and these organizations also give chattel mortgage interest to customers. Car loans can be procured through banks of the customer’s choice or through dealers themselves and this loan is then applied through a Chattel Mortgage contract. Filipino citizens can apply for Chattel Mortgages online with various banks and lender network websites. If opting for financing from dealers then customers need to be aware of all the financial implications. Customers may be lured in by freebies and additional features that may seem beneficial at first glance but is actually unnecessary. This can be avoided by following the steps given below -
- Customers must negotiate with dealers regarding the price offered, as this amount usually includes the agent’s commission and such.
- They must also have a knowledge of the tax and legal implications such as the basis of documentary stamp tax being charged.
- Keep an eye out for hidden costs. Freebies and discounts are usually compensated for in other expenses.
Advantages and Disadvantages of obtaining Chattel Mortgage
One of the biggest advantages of chattel mortgage loans is that, due to the fact that there is a collateral, interest rates are usually lower as compared to other loans. Therefore, customers can opt for this and save a lot of money in the process.
Customers procuring cars for business purposes through Chattel Mortgage can also claim their interest, depreciation and GST back.
Another advantage is that the property that is provided as collateral can be sold quickly in case of lapses in payments or if a deal falls through and the lender can be compensated pretty easily.
However, a con to obtaining chattel mortgage is that if customers do not repay their loans on time then they stand to lose the property or their car (the item that is mortgaged.)
Customers can procure chattel mortgages by pledging their movable property. These mortgages come with a lot of pros and cons and both should be considered carefully before opting for this kind of a finance method. Customers must ensure that they understand all the legal and financial implications of obtaining a chattel mortgage and then opt for it if it is financially advantageous to them.