You have just received your 13th month pay. Or perhaps you also received a bonus on top of it. This is what you had been waiting for. When combined with what you had set aside for several months now, you can finally make the down payment on that dream car of yours.
STOP! Think things through first.
You are obviously going to borrow to buy your car. Do not buy your car the lazy way. Beware of some of the all-in, low down payment, and low amortization promos. They will all cost you more and here’s how.
The list price of each car is called the suggested retail price or SRP. Did you know that you can buy a car on cash basis and get tens of thousands of Pesos off the SRP? And even when you borrow from a bank directly to buy a car, the loan proceeds plus your down payment are treated as cash payment by car dealers.
But please take note that I mentioned borrowing from a bank directly. The lazy way of buying a car is to let the car dealer work out the financing for you. In doing so, they earn a dealer’s incentive from the bank. How much is the incentive? As of this writing, a bank could lend you at 10% p.a. effective while the interest rate for loans worked out by the dealer can go up to as high as 17% p.a. effective.
Here’s the thing, the dealer will not show you the effective interest rate. All they will show you is the SRP, the amount of down payment, the monthly loan amortization and the length of the loan. While all of the information needed are already given to compute effective interest rate, you will need a financial calculator or computer spreadsheet to do that. Your brain will resist doing the difficult. And if you don’t make the extra effort, you might just end up paying for your laziness for up to the next five years. And by the way, you do not get the cash discount if you get financing through the dealer.
Please also take note that low amortization either means high down payment or longer repayment terms. Low down payment either means higher amortization or longer repayment terms. The promo is just like a see-saw wherein one loan factor goes up when another goes down.
One other trick of dealers is to use simple interest rate. This is nothing more than totaling all the interest to be paid, dividing it by the original loan amount and dividing the answer by the term of the loan.
So, how do you fight against this trick of the trade?
Simply ask for the true effective interest rate from both the dealers and the banks. After all, the law requires them to do so. Lastly, validate their quotes with a bonafide financial planner. This will help you separate the promos from the no no’s.
While some promos may be no no’s, protecting the financial welfare of your family is a definite Yes! This purpose becomes all the more “a must” if your children are still too young to fend for themselves. If your family is suddenly out of an income due to the breadwinner’s disability or death, they should at least have resources to tie them through—until a more permanent solution or income replacement is established. This is a need that only life insurance can satisfy, reason why such offers that come your way should be seriously considered and not quickly set aside for a later date.
We, your FinancePH advisors, will be glad and more than willing to help you plan your finances. Our customized financial planning approach caters to each individual needs, budgets and priorities.
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(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)