Is it a good time to take on new or more debt?
As we were preparing to welcome 2021, my husband was sharing how two of his work colleagues were trying to beat the deadline and process documents for car loans before the last business day of 2020.
With all the uncertainties of 2020, which many expect to remain for 2021, it didn’t seem to be a wise move to start the new year by taking on new or more debt.
For one of them, it meant getting his hands on his first car. To drive home an entry level compact car, he only had to pay P48,500 as down payment. For a five year term, he will pay P16,300 for the next 60 months. The listed price of the car was P841,000, and his total payments – including his down payment and monthly amortization – come to P1,026,500. If we deduct all his payments to the cost of the car, his interest fees are P185,500 for five years, or P37,100 annually. To someone like me who is debt-averse, it’s not a bad deal. And while he is largely working from home, the sad state of our mass transportation and the critical need for social distancing makes me very supportive of his borrowing decision.
Now let’s look at his other colleague. He is taking out a loan to buy a second car, and he was prompted to do so after receiving his year-end bonus. He picked a China-manufactured SUV (sport utility vehicle) which surprisingly at P868,888 was about the same cost as the entry level compact car from a more popular auto manufacturer. With his bonus pay, he could afford to pay a much higher down payment, resulting to a much lower monthly amortization, and a friendlier interest rate. Buying a second car when the economy looks this bad is not something I would do, but he is looking to trade up and will soon sell his other and older car to avoid higher maintenance costs. Sounds like a good plan don’t you think?
If all these talk and numbers are making you want to get a car of your own, keep in mind these 5 things before you sign on the dotted line of a loan contract.
#1 Why not a second-hand car?
Financial experts will tell you that a car is not considered an asset despite its price tag. Why? Because you will pay increasingly more for something that will be worth increasingly less. When you buy a brand new car, the minute you drive it out of the showroom, it already lost between 10% to 20% of its resale value.
So if you are looking to own your first car, or to have a second car to meet your family’s growing transportation needs, how about shopping around for a good value second-hand car? My husband’s first car was a second-hand car and he got such a good deal that when it was time to trade up, he still went for a second-hand car. Of course as with anything you buy, do your homework and bring along a trusted car mechanic to thoroughly inspect the merchandise.
#2 Never pay the sticker price.
Do not go into battle without knowing the lay of the land. In this case, discover the real price of the car by asking around and putting the Internet to good use. Promos are offered almost year-round, and there is always a friend of a friend who can extend you a discount or load up your dream car with accessories you need and want.
Another way to go about your car shopping is to start with how much you can afford and then make a short list of cars that cost less than the amount. This way you do not fall for the sales talk and end up driving a car that will burn a hole in your pocket for many, many months to come.
#3 You’re not just paying for the car, you know.
When planning to buy a car, consider related costs starting with insurance, maintenance fees, gasoline expenses, and even parking fees. Depending on the cost of your car, the insurance premium can be pretty high and another drain on your budget. If you are taking out a loan, the bank or the car dealer (for in-house financing) will not give you a choice where to get the insurance so you cannot even shop for lower premiums.
Add to that gasoline costs, maybe roadside assistance and parking fees as you go about town and you will realize you have taken on a huge expense responsibility. Do not underestimate parking fees – when I was working in Makati, I had to make a tough choice: bring my car to work and pay the daily parking fee or eat lunch.
#4 Haggle for the best loan deal.
Getting the best price for the car is a good thing, but getting the best loan deal is even better. List as many as 10 banks, more if possible, and start calling them and provide details of your planned car purchase. Ask for loan estimates – it’s free anyway – and start comparing their interest rates and fees.
If you have a bank you prefer, you can show them a lower rate offered by another bank and they may match it. Look for other fees too – from processing fee to early termination fee to penalty fees. If you have the option of in-house financing, make sure to check how they compare against the banks. Do not go for convenience which may cost you more. The less you pay, the better for your wallet.
#5 Update your monthly budget with all the car expenses.
You may have done some calculations on what car you can afford, but nothing like plugging in the numbers to your monthly income and monthly spending to get a reality dose of whether you can really afford it. When you know the down payment, the monthly amortization, the gasoline expenses, and all the other fees that come with being in the driver’s seat, update your budget and see if you will end up in the red. If yes, you may have to give up some things to make room for the car. If you can afford it, then time to put on your driving shoes, and maybe splurge on a nice keychain.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.