• Dealership Vs Bank Financing for Car Loans

    Porsche, BMW, Toyota, Ford, Mitsubishi or a Ferrari, cars are everyone’s dream possession. Regardless of the brand or make or model owning a car is not just convenient, it is also seen as a status symbol. Almost everyone today aspires to own the latest set of wheels that would make them the envy of their neighbours and the more expensive and swanky the car is, the higher is the person’s status in society.

    There are a variety of models available in the market today catering to different needs and requirements in terms of mileage, make and even the price point. Financing the car is the next step and in this regard as well there are a variety of options available. The best and quickest option that customers can choose is paying for the set of wheels in one lump sum amount. This option has a number of advantages that comes with it. Although, this may seem like a lot of money that is being spent in one go, it is the most beneficial of all financing options. By paying for the car in one go, customers need not worry about interest rates or paying for the car loan every month or mortgage charges and others which would be the case if customers opt to pay for their set of wheels through car financing options. However, many customers would not be able to afford to do so hence their next best option is to purchase the car via car financing options such as car loans, hire purchase and others.

    Individuals can opt for a variety of car financing options available in the market today. Some of the prominent ones are Car loans, Hire Purchase, Personal Contract Hire or Personal Contract Purchase.

    Car loans refers to customers procuring the required finances to pay for the car from a financial institution, lender or bank. This is the one of the more common financing options that customers opt for. Banks or lenders provide a certain amount of loan based on the car make and model and also requirement of the customer. Interest rates imposed by the banks are also based on the quantum of financing provided and the ability of the individual to repay the loan determined by the monthly or yearly income. Banks usually offer tenures of 1-5 years, however customers are advised to opt for a lower tenure as a higher period would also increase the amount of interest paid. This option is feasible for those individuals looking to own their car on an immediate basis and for a long time use. Customers must ensure that they make their repayments on time as lapses in this may result in a higher interest amount and additional penalties to be paid by the individual. Interest rates also vary based on whether the customer is purchasing a brand new car or a used one.

    Initially implemented in the United Kingdom to assist customers in purchasing expensive items, Hire Purchase is another common method of car financing. If prospective car buyers opt for this process, then they will have to pay a certain amount as deposit, usually 10%-20% of the purchase price and then pay for the rest through monthly fixed deposits. Until the customer completes payment for the car he/she will not be able to own the car nor will he/she be able to sell it.

    Personal Contract Hire or PCH is another option that customers can choose via which they can pay for their car. This option is more or less similar to leasing a vehicle and customers who procure this option will have to pay a fixed amount as rent for their car for a predetermined amount of time along with a mileage limit that is also usually fixed. Customers cannot purchase the car at the end of the rental period. This is an ideal option for those looking to change their cars and frequently and do not want to suffer through car depreciation.

    Another popular choice that customers can opt for is Personal Contract Purchase which is an option similar to Hire Purchase. If opting for this, individuals after finalizing the car, will have to pay an initial deposit amount and then pay the rest through fixed monthly installments. At the end of this term, customers can either keep the vehicle, return it to the supplier or exchange it for another car. The value will not increase unless the car is damaged.

    Out of all the options available, customers usually opt for car loans as it comes with a lot of advantages and enables customers to own the vehicle immediately. The two main sources of finance that customers opt for are from banks and dealers.

    Bank finance or Dealership for car loans?

    Customers can opt for Bank financing or from Dealerships as they come with their own set of advantages and disadvantages. By going through the features of these finance methods, as mentioned below, customers can decide the best option that suits their financial requirements.

    Certain banks also have tie-ups with dealerships and although this may seem to be a perfect and advantageous option, the quantum of finance provided may be limited or they may have other restrictions in terms of interest rates and such. However, certain partnerships such as the above may provide better rates and easier repayment options. Customers may have to go through all the available options before making their decision.

    Bank Finance

    Auto loans are provided by many banks within the Philippines at attractive interest rates and convenient repayment tenures. Although customers will have to do a little bit of homework before choosing a particular bank to obtain finance from, there is a higher chance of them acquiring loans at low interest rates and with additional benefits and features. Also loans are usually provided before the customer actually goes to choose and purchase the car, hence a budget is set. Usually, customers who have had relations with a particular bank for a long time have a chance of procuring additional discounts in interest rates. This is especially so if the customer is already utilizing products from that particular bank such as credit or debit cards, then customers will be able to negotiate for a more economical rate of interest and flexible tenures as well. Banks also have a eligibility criteria in place for customers looking to procure auto loans. Generally customers who meet the following eligibility requirements qualify for auto loans, although this criteria may vary from bank to bank.

    • If customers are Filipino individuals who are below the age of 70 before maturity of the loan.
    • If customers have an income of P30,000 per month or higher.
    • If customers are purchasing new cars or used cars that are no more than 5 years old.

    Another advantage of obtaining finance from banks is that, since there is no middleman involved, the rates are likely to be lesser as middlemen usually require additional commission. Although there are many advantages to procuring car loans from banks, there are certain setbacks as well. One of the most important ones is that, customers may not have the option to negotiate with them in terms of reducing interest rates and such. Usually the rate quoted is the final one and customers will have to adhere to that.

    Dealership Finance

    Dealership financing seems to be the most convenient option at first look but this may not be the most beneficial one. Customers believe that by obtaining financing from dealers, they have taken the easy way out as they can purchase the car, obtain financing all at the same time and hence is more convenient. Although customers can procure feasible deals, they must realise that dealers obtain commissions from the loans that customers procure hence they may persuade customers into obtaining finance from them at a rate that may actually be detrimental to the customer.

    However, if customers do obtain financing from the dealership they need to ensure that the lender is reputed and provides good rates. And if the loan is being obtained from a bank that the dealer has a tie-up with, then the bank must be located such that the customer can directly communicate with them in case of any issue.

    Dealers usually require a down payment from the customer and the rest is to be paid through monthly installments and the most common option provided is a down payment of 20% and 5 years to repay the entire loan. Paying a higher amount as down payment and thereby reducing the amount to be paid as loan is advisable. A lower amount to be repaid also indicates a reduced rate of interest and it is advisable for customers to repay these loans in a short tenure to avoid paying higher interest.

    While procuring financing from dealers, customers need to enquire regarding the deal and all the financial implications that come with it. Customers doing their own calculations is also good as sometimes what seems like a great deal may not actually be one.

    In case dealers make any additional offers, customers must not be swayed by it before actually understanding it thoroughly and determining if it is absolutely necessary.

    Tips for customers -

    • In order to procure the best deal, whether from banks or dealerships, customers must look and shop and research all their available choices wisely. Customers should also never go by a deal that seems great in paper as they may actually not be so good in reality.
    • Banks and dealers offer the best deals to customers with a good credit record as they pose the least amount of risk in terms of repaying the loan. Hence, before purchasing a car, customers must ensure that their credit records are in good shape and ought to work towards maintaining this.
    • Customers need to keep an eye on any freebies or deals that seem too good to be true because in most cases, they usually are. Examples include free chattel mortgages or free insurance and such deals usually imply a higher rate of interest. The cost of these ‘free’ offers are usually made up for elsewhere.
    • Lastly, while fixing a deal, whether with a bank or through a dealer, customers must choose the option that suits their financial status and requirements the best.
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