As a former bank employee, one of the most common questions I get is which is better? Buying a brand new car with CASH upfront or going through the process of BANK CAR FINANCING? If you haven’t had much experience in buying a car, here’s the deal. There are the 2 options to choose from when transacting with a Bank: Either you have it financed by the bank and pay the loan monthly OR buy it with Cash upfront as if you are buying a pair of new shoes from the store with cold cash.

In this post, we will list the advantages and the drawbacks of each option. In addition, we’ll be including IN HOUSE FINANCING or dealership financing, so you could weigh all 3 options and find out what suits you best. If you are not familiar with these payment options then read ahead and be wary of their Pros and Cons.

CASH or BANK FINANCING or IN HOUSE FINANCING?

PAYING WITH CASH

PROS:

  • the car is deemed yours already the moment you pay for it
  • you pay exactly the price as shown
  • you are worry-free from weekly,fortnightly or monthly payments of amortization. Thus, you don’t need to include it in your monthly budget
  • you are free from huge interest rates

CONS:

  • by availing car financing, you are actually building your CREDIT SCORE.

Credit score is one of the methods banks, insurance companies and other financial institutions use to assess a borrower’s credit risk. When paying with cash, you are missing out your chances of building your credit score with the bank since no history of debt will be written under your name.

  • due to the fast depreciation of cars, you won’t be able to sell your car at the same amount you bought it. The longer you have your car, the lower amount you can sell it for.
  • when you get your car financed, you can save some money in the bank which can be used for other projects or to pay your other loans. When paying with cash, your money is instantly the seller’s cash

 

 

BANK CAR FINANCING

If you aren’t capable of purchasing one with cash upfront, bank financing is your next bet. But do keep in mind that it may come  with challenges that may or may not make a car purchase easy for you.

PROS:

  • If you have a stellar Credit score standing then there’s a big chance you can qualify for low interest rates
  • you dont need to shell out one big amount in just one transaction. Your extra cash can be used for saving or paying off other debts
  • you are able to build your credit score, just make sure to avoid delinquent or late payments or else you may be left with a bad credit score and standing.
  • Lower interest rates than In House financing.
  • Some banks will allow you to get pre-approved, if you’ve been using their service for a long time and have a good record with them.
  • in case you are unable to continue paying the remaining balance of your bank car loan, you can opt for an “assume balance” scheme wherein  you, the seller, allows a buyer to take on your loan as well as pay for the car.

CONS:

  • banks have stricter requirements and processing time takes longer. Usually clients who have a good relationship with the bank or with a good credit history can easily apply for one
  • you have to deal with monthly payments.Payments that have to be attended to every month for the next 1-5 years depending on your  chosen term. Not paying on time may lead to penalties later on
  • you have to pay for the interest rate as this how finance companies work. Interest is a fee you pay the bank for allowing you to borrow the money in the first place.

IN HOUSE FINANCING or DEALERSHIP FINANCING

If you are having a tough time applying for a Bank car loan, then In house financing is your best option since salespersons are really willing to serve clients who cannot pass the bank car loan qualifications.

PROS:

  • faster processing time than Bank financing
  • Unlike the bank, requirements are more lenient. You just have to show a few good enough income documents
  • compared to banks, they allow Downpayments as little as 10% and payment terms of the whole loan can stretch up to 6 years ( 72 months). A friend of mine shared that he has paid a downpayment for as low as P10,000.

CONS:

  • their interest rates are usually higher than banks due to the leniency of their approval process
  • Deals such as free chattel mortgage or comprehensive insurance will probably make the loan have higher interest rates. The cost of these “free” items are actually hidden somewhere just to make the loan more attractive.
  • the lower the Downpayment,the higher the loan.The higher the loan, the longer the payment term. Thus leading to higher interest rates.
  • Always remember to shop around before closing any deals. Your decision shouldn’t be solely based on the overall interest rates, but rather on which one is more suitable to your financial standing and capacity.

Disclaimer: These rules apply to most banks. They may differ from your local bank, depending on government changes, and individual banking rules. This guide is generally speaking and taken from my experience working as a new accounts staff and sales officer in several different institutions in my banking career of  5 years.


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By Ameena Rey-Franc

Recognized as one of the Top Finance Blogs in the PH. Ameena Rey-Franc (founder of TTP) is a former Banker and BS Accountancy graduate turned Blogger, Keynote Speaker, and entrepreneur. Currently an RFP delegate, she is also the Author of a book about Financial Resilience and has held seminars for reputable companies like GrabFoodPH, Pru Life UK, VISA, JPMorgan Chase& Co., Paypal, Fundline, Moneymax, and many more. The Thrifty Pinay's mission is to empower women to LEARN, EARN, and be FINANCIALLY-INDEPENDENT no matter what life stage they are in.