IN the highly competitive auto-loan market, different vehicle brands come out with their own gimmick to make it look like owning a car is as easy as 1, 2, 3. Everyone wants to have a low down-payment program deviating from the previous industry standard of a 20-percent down payment. I have even seen cases where the down payment is even lower than the monthly!
Another trick to attract attention is coming up with super low monthly payments that seem really low and affordable, until you see that you have to make a 50-percent down payment to get that low a monthly payment. What do all these “attractive” offers of low down and low monthly get for the auto buyer? Well, it can get them into a lot of trouble.
Think about it, if someone who wants to buy a car can only make a down payment that is lower than the monthly amortization, he will definitely get into trouble when he needs to make his first monthly amortization and will be facing the same challenge for the remaining 59 monthly amortizations after that. Likewise, when someone who wants to buy a car can only afford a very modest monthly amortization, it shows that his sources of cash flow are also very limited. Therefore, he has to make a substantial down payment, which is either money he does not have or will wipe out any saving he has that, when a true emergency comes, he will have no funds that he can draw from, leaving him in a lot of trouble.
What then is a smart consumer to do when he needs to buy a car? First is to determine if he really needs a vehicle in the first place. If you are just walking distance from where you live to your place of work, it would be hard to imagine that you would need to own a car. However, if you are a family of five that needs to all go to the same place on a regular basis, then you can probably justify owning your own vehicle.
Remember that owning a car or van has many recurring costs such as registration, insurance, parking, maintenance, fuel and so on. There is also a direct correlation to the initial cost of the vehicle to the recurring expenses. For example, a big car costing P2 million versus a small car costing P500,000 will also cost you more in terms of insurance, maintenance and fuel. Also, your monthly depreciation/amortization expense will be more as the value of the vehicle increases. Therefore, if you are on a budget, look for the vehicle that will fit your need and cost you the least, both in terms of initial outlay and maintenance. Secondhand cars may seem like a great idea but, remember, it does not come with a warranty and we all know that as vehicles become older, they require more tender loving care and demand more from your wallet.
Make use of auto loans as sparingly as possible. Remember they are a loan that you are paying interest on. Look at how much you have to make the down payment, and just leave some for your immediate needs and emergency requirements. After making the down payment, you will be left with the amount that needs to be amortized and see if you have enough cash flow to make the monthly amortization, after you deduct your living expenses and other costs like tuition, monthly dues and other obligations.
Don’t be carried away into buying a car that you cannot really afford because you have the money to pay for the low down payment but will not be able to make the monthly amortization, or you can make the monthly amortization but do not have the large amount needed for the high down payment.
Of course, as the competition heats up, financing companies will need to find ways to make their offers more and more interesting to the consumer. Anyone up for a zero-percent down payment?
George Chua
Comments may be sent to georgechuaph@yahoo.com.