Should you buy a car on loan?

By Randell Tiongson on June 29th, 2011

It seems that every Filipino’s dream is to have his own car – maybe even earlier than owning his own residence. Never mind the unbelievable traffic, the long hours of driving and the worry of depreciation and maintenance cost, many of us would focus on the merits and benefits of driving our own car. A vehicle is one of the earliest investments we long for, aspire for and work hard for. Anyone who has experience riding the MRT during rush hour, stranded in a bus stop or refused by a taxi cab driver would yearn to be able to afford what seems to be an elusive convenience. Having a vehicle of your own is a worthy goal. A car, after all, can be a very productive tool for the individual.

What hinders us from achieving our dream of driving our own car? Cash. Cars are not necessarily cheap and the prohibitive cost of acquiring a vehicle makes this goal so elusive. The good news is, you can still have your own car, enjoy the enormous benefits and pleasure it brings even if you don’t have the full amount to pay for it. The answer? Get a car loan. Car financing has made owning a car a realistic dream for the average Filipino. When Henry Ford built cars, he envisioned that every American family should have a car – today, that same goal now hold true in our country as well.

Having your own car provides a lot of value. Your mode of transportation is more efficient, you can get to more places in a more convenient fashion and it ultimately improves an individual’s productivity. Further, a car brings a lot of joy to the family; a family car helps foster better relationships for the family members as many memories are born from many trips using the family vehicle.  A car can really help one achieve a better life.

Nearly all banks offer attractive car loan programs and today’s low interest scenario makes acquiring cars relatively cheaper. Here are some tips for those who are thinking of financing their car purchase:

1)      Shop for good rates. Check out different banks that offer financing and you can actually ask for lower interest and you might be surprised that some of them are willing to lower their rates.

2)      Go directly to the lenders and not course the loan through the dealers. Banks gives commissions to dealers so if you go straight to the banks, chances are you can get lower rates. The same also works for car insurances.

3)      The higher your down payment, the better. Interests are charged as an add on rate and not on diminishing balances which means the effective rate is actually higher for car loans. A good way of reducing interest expense is having a higher equity portion, say 40 to 50%. Many programs entice us with low down payments because that will mean we will pay more interest. Nothing wrong with that, that’s how financial institutions earn but we must always be prudent at how we spend our hard earned money.

4)      Consider pre-owned cars. Contrary to popular notion, pre-owned cars can be financed. Cars depreciate fast in the first 2 years. A 3 year old car would still be relatively ‘new’ and have depreciated a lot, which means lower purchase cost and interest for you. In the book Millionaire Next Door, the author cites that many millionaires in the US buy 2 to 3 year old cars.

Owning a car is a reasonable aspiration and it can bring us a lot of joys. However, when owning a car will restrict your budget to a point of drastically reducing your quality of living, better think twice and wait further.

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6 thoughts on “Should you buy a car on loan?”

  • Great tips for people looking into buying cars. Perhaps another tip would be for car buyers to just borrow money from parents at a lower or no interest. And with this, we have the real ownership of the car, rather than making the bank the partial owners of it while on loan.

  • I don’t see a car as an asset. Everytime you use your car, you spend. Gas, maintenance,insurance,lto registration (including drivers license renewal), the cost of owning a car is expensive much more a car on loan! I believe its resting more on the liability side, it only becomes an asset if it actually helps you bring more cash to your pocket…please explain why a car will ultimately improve an individual’s productivity? Why I have no issue about using the car for bonding purposes with people we care most, the idea that a car will make somebody more productive is kinda blur.

    In the end, buying a car (or a second hand one) on cash than on loan is wiser if you really need one.

  • A car can be an asset, it just depends on how you use it. If its just for porma or convenience then true, its a liability. But if the car is used to generate more business for the owner, or increase the quality of sales of the owner’s business, then the car is paying for itself, thus making it an asset. I always consider monthly car payments and other car related expenses as business cost. So it depends on the owner if a car is to be considered an asset or a liability.

  • Not everything in this world should be strictly used in a cost-benefit kind of way. True, using a car without getting any income as you use it is technically an expense. But if this expense brings you safety, security, mobility and convenience then it servese its purpose. Randell was very clear in his last paragraph that if this will compromise your quality of life then you should wait.

    Have an income stream to support a personal vehicle – that’s the way to do it.

  • I strongly agree with you nonoy. If buying a car brings you safety, security, mobility and convenience then it servese its purpose. It doesn’t matter if it does not bring you income a long as you are happy having it that just fine.

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Should you buy a car on loan?