12 Important Financial Terms Used Car Buyers Should Know
Purchasing a used car is a significant financial decision—one that involves more than just selecting the right vehicle. For many Filipinos, especially those considering financing options, it's essential to understand the financial terminology involved in the buying process. Being well-informed not only helps in choosing the most suitable loan but also prevents unexpected costs and commitments down the line.
This article outlines 12 key financial terms that every used car buyer in the Philippines should know. Familiarizing yourself with these terms will empower you to navigate the financing journey with greater confidence and clarity.
1. Down Payment
The down payment is the initial amount you pay upfront when purchasing a car. In the Philippines, this typically ranges from 20% to 30% of the vehicle's price. The higher your down payment, the lower your monthly payments and overall loan amount. A substantial down payment can also increase your chances of loan approval.
2. Loan Term
The loan term is the maximum length of time you agree to keep the loan outstanding, typically ranging from 12 to 60 months in the Philippines. Longer terms can make monthly payments more affordable, but they come with higher interest costs over time. Some loans also allow you to repay early without penalties, providing an opportunity to reduce the total interest paid. When selecting a loan term, it's important to find a balance between monthly affordability and the total cost of the loan, as well as to understand if early repayment is an option.
3. Interest Rate
The interest rate is the cost of borrowing money, usually expressed as a percentage of the loan amount. Car loans can come with fixed or variable interest rates—fixed rates remain constant over the life of the loan, while variable rates may change. Interest rates are often given as an annual percentage rate (APR), but some loans may express the rate monthly or even on a daily prorated basis. Always request the APR, as it includes any fees and gives you a clearer idea of the loan's total cost.
4. Monthly Amortization
The monthly payment you make towards your car loan can be structured differently depending on the loan type. In an amortizing loan, your payments cover both portions of the principal as well as the monthly interest, gradually paying off the loan balance. On the other hand, a bullet loan requires you to pay only the interest during the loan term, with the entire principal due as a lump sum at the end of the loan period. You can use online loan calculators to estimate your monthly amortization for an amortizing loan, considering your vehicle, down payment, loan term, and interest rate.
5. Principal
The principal is the base amount you borrow from the lender, before any interest or fees are added. It’s the core of your loan, and your repayments gradually reduce this amount over time.
In most car loans (which tend to be amortizing loans), your monthly payments chip away at both the principal and the interest. In contrast, a bullet loan defers repayment of the principal until the end of the term. If you’re in an amortizing loan, making extra payments to reduce the principal early can help lower your total interest costs.
6. Credit Score
In the Philippines, a credit score is part of your credit report compiled by the Credit Information Corporation (CIC) and accredited credit bureaus. It summarizes your creditworthiness based on your loan history, payment behavior, and current obligations. Lenders use this score to evaluate your ability to repay and decide whether to approve your loan application.
7. Collateral
Most car loans in the Philippines are secured loans, meaning the vehicle itself acts as collateral. If you fail to make payments, the lender has the right to repossess the car. Understanding this helps you assess the risks involved and encourages responsible borrowing.
8. Loan Approval
Loan approval is the lender's decision to grant you the car loan. This is based on various factors like income, employment history, age, and existing financial obligations. Preparing documents such as payslips, valid IDs, and proof of residence can streamline the approval process.
Revised version:
Loan approval is the process by which a lender decides whether or not to grant you a car loan. The decision is based on several factors, including your monthly income or cash flow, employment history, age, and existing financial commitments. Lenders may also look at your credit score and debt-to-income ratio to determine your ability to repay the loan. Preparing the right documents, such as payslips, valid identification, and proof of residence, can help speed up the process and improve your chances of approval.
9. Chattel Mortgage
A chattel mortgage is a legal term for an agreement where the lender retains ownership of the vehicle until the loan is paid in full. The vehicle is considered encumbered, meaning it’s used as collateral, and the lender has a legal claim over it until the debt is satisfied. In the Philippines, chattel mortgages require registration with the Land Transportation Office (LTO), which may incur additional fees. Be sure to check with your dealer whether these fees are included in your financing package.
10. Comprehensive Insurance
Financed vehicles are usually required to have comprehensive insurance, which goes beyond basic coverage. It protects against theft, accidents, fire, and natural disasters. While it adds to your cost, this insurance is crucial in safeguarding your investment, especially in the event of unforeseen incidents.
11. Total Loan Cost
This is the full amount you'll end up paying for your car, including down payment, interest, insurance, and fees. As a general rule, your total loan cost should be equal to the following: multiply your monthly amortization by the number of months in your loan term, then add your down payment. Comparing total loan costs can help you choose the best financing option.
12. Early Repayment / Pre-Termination Fee
Want to pay off your loan ahead of schedule? Some lenders charge a pre-termination fee, which is a penalty for early repayment. However, other financing partners may offer flexible terms that allow early repayment without penalties. Always ask about this in advance.
Be a Smart and Informed Buyer
Understanding these 12 financial terms empowers you to make better decisions when financing your next used car. No more surprises, no more confusion—just clarity and control.