How to avoid falling into auto promo traps

By Aida Sevilla-Mendoza Philippine Daily Inquirer September 11,2019

Big, eye-catching print ads are coming out these days offering brand new cars for no down payment or as little as P3,000 down payment.

It goes to show what drastic marketing schemes carmakers are resorting to in order to boost their sales figures.

The downside to easy auto loans (“Approved in one day!”) is the rising number of motor vehicles that are repossessed by the banks when buyers default on their monthly payments.

What, then, must consumers applying for an auto loan watch out for to make sure that they are getting a good deal? That they are unlikely to end up having the car repossessed due to disadvantageous loan terms?

To find out, PDI Motoring interviewed online Augustus “Joe” Ferreria, who heads a financial consulting company called Money Doctors.

Sum up the total payments

Whether applying for an auto loan at a bank or at in-house financing for cars, a simple way of determining if you are getting a good deal is to sum up all the amounts you will pay to purchase the car, Ferreria says.

This would include the down payment, all the monthly amortizations for the duration of the loan, and bank charges you have to pay at inception.

Banks and in-house financing for cars compute interest payments differently. By relying only on the quoted rate of the loan, you might be led to believe that one is cheaper than the other, he warns.

Therefore, summing up the total payments to acquire the car is the best way to figure out if you are getting a good deal.

When the consumer defaults

Delaying or failing to pay the monthly amortizations carries penalty charges which of course become income for the bank or financing institution.

“On repossession, I would venture a guess that it would happen after 12 months to the halfway point of the loan,” Ferreria says. “If the consumer has already paid three or more years on the car, the natural tendency is to find a way to complete the credit arrangement rather than surrender the vehicle to repossession.”

The bank wins

In any case, the bank comes out the winner. “In a typical chattel mortgage, the interest charges are front-loaded,” Ferreria explains. “This means you are paying more interest than the principal monthly.

“The percentages reverse after the loan has passed its halfway point.

“If the repossession happens during the first two years, a lot of interest income would have been already earned by the bank.

“Also, the market value of the car may be higher than the remaining loan balance, thus the bank would have recovered the amount they lent, and made interest income out of the deal.

“Normally, they would also require a down payment to protect their interest in recovering the amount of money lent.”

Selling repossessed cars

Ferreria says that most repossessed cars are sold as second-hand vehicles, unless they are in really bad shape and the only recourse is to sell to a scrap yard.

Second-hand car dealers regularly make the rounds at repossessed car auctions, so the disposal is done quickly, he added.

No Down Payment and Low Down Payment Promos

The banks offer these promos supposedly to the general consuming public, but only buyers with stellar credit rating can qualify, Ferreria pointed out.

“Sub prime borrowers are never approved for these promos. The chances therefore of a loss by the bank are minimal,” he noted.

Banks earn from these promos by imposing higher interest rates. This is logical, since the bank is incurring a higher credit risk by accepting a deal with no down payment. The general rule is, higher risk equals higher interest rate.

Another way banks earn from these promos is by insisting that in the first year, the insurance is bought from the dealer. “I was told that car dealers get ‘incentives’ from banks for booking a loan with them,” Ferreria observed.

The importance of the loan document

Lending rules protect consumers transacting an auto loan by requiring transparency on interest payments and the rate charged.

“The bank should give you an amortization schedule for you to see all that,” Ferreria says. “You should also read the entire loan document before you sign. Do not assume anything, educate yourself on the details of the credit arrangement, and you’ll be okay.”

When a consumer fails to repay the loan for, say, three consecutive months, there are tolerances for delays and the bank acts according to the number of days delayed or without payment.

“The practice may be different from one bank to the other,” Ferreria avers. “Again, reading the loan document will make you aware of what they will do if you don’t pay.”

Summing up

Getting an auto loan has its advantages and disadvantages.

The advantage is that an auto loan will allow you to buy a vehicle with monthly payments you can afford.

Moreover, auto loans build your credit rating, provided that you make the payments on time, and give you the opportunity to buy a better vehicle that may have been too expensive if you were to pay cash.

On the other hand, while an auto loan enables you to obtain a car without having to pay for it in full, you are required to pay interest in addition to the principal, effectively raising the total cost of the car above its SRP.

When you finance a vehicle, it is probably brand-new with a relatively high market value, so your auto insurance premiums would also be higher.

Since auto financing is a form of secured loan, you must agree to put up the vehicle as collateral to gain approval for a loan. The bank or lending institution owns the car although it is in your custody. Technically, the car is not yours and you are practically renting it until you have fully paid the car’s amount.

It also means that if you fall behind on your payments, the bank can repossess the car. A vehicle repossession puts a black mark on your credit history that can last for several years.

Despite these disadvantages, auto financing is a booming business. As a result, the banks, car buyers and carmakers are happy—a win-win situation for everybody.

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