Important financial terms a car buyer must know

Buying a car is no less than a celebration. However, the four-wheeled pleasure comes with its set dictionary, which the owner needs to be well acquainted with. No, we are not talking about the mechanical know-how but the financial terminology that a car owner will start hearing ever since the thought of buying a car sprouted in his/her mind.

In this article, we’ll be discussing 14 such financial terms that prove very helpful in your car-buying journey. So, without further ado, let us get started.

Also Read: How to budget for your car loan repayment effectively

MSRP (Manufacturer's Suggested Retail Price)

Definition: MSRP refers to the price recommended by the manufacturer for the sale of a car.

Importance: The MSRP serves as a starting point for car price negotiations. Knowing the MSRP helps you understand if you're getting a good deal or not. Dealerships usually list cars above MSRP, but buyers can reduce the price with good negotiation skills. Additionally, seasonal promotions or special discounts can also affect the final price paid.

Total Cost of Ownership (TCO)

Definition: The total cost of owning a car not only limits what a buyer pays at the dealership but also includes the vehicle's lifetime expenses, including purchase price, financing, insurance, maintenance, fuel, depreciation, and taxes.

Importance: Considering the TCO helps the buyer understand the long-term financial commitment of car ownership. For instance, a cheaper car with poor fuel efficiency and high maintenance costs is more expensive than an expensive but more efficient and reliable vehicle. Several tools are available online to estimate the TCO for different models, thus helping buyers make a more informed decision.

Trade-In Value

Definition: The trade-in-value refers to the amount a dealer is willing to offer for the buyer’s old car as part of the payment for the new car.

Importance: Understanding a car’s trade-in value can significantly impact the purchase. Often dealers offer less than the car's market value, so it’s beneficial to do some research beforehand. Knowing your car’s worth puts you in a position of leverage during negotiations, as it potentially increases the trade-in offer or you’ll end up getting additional discounts on the new purchase.

Financing

Definition: Financing is obtaining a loan to pay for the car, typically through a bank, credit union, or dealership.

Importance: Different auto financing options come with varying interest rates, terms, and conditions. It is a must to shop around to procure the best financing deal available and save money. Often, banks and credit unions offer better interest rates than dealerships. However, dealership financing is more convenient and sometimes includes promotional rates. However, it is a must that you understand all terms clearly before committing.

Loan Term

Definition: The loan term refers to the duration over which the loan is to be repaid. It is typically expressed in months (36, 48, 60 months).

Importance: The loan term has a direct impact on your monthly payments and the total interest paid. For example, a longer loan term usually results in lower monthly payments but higher total interest costs. Conversely, a shorter loan term means higher monthly payments but less interest paid overall.

Interest Rate

Definition: The rate of interest is the proportion of the loan charged as interest from the borrower; it is typically expressed as the annual percentage of the loan outstanding.

Importance: The interest rate significantly impacts the total cost of the loan. Lower interest rates reduce the amount of money a borrower pays over the life of the loan. For example, on a PHP 1,000,000 loan for over five years, an interest rate of 5% results in lower total interest payments compared to a 10% rate. It is advisable to always compare interest rates from multiple lenders before deciding on an auto loan.

Also Read: How to calculate your used car loan payments: Tools and tips

All-in Downpayment & Down Payment

Definition: Downpayment is an upfront payment made by a customer when purchasing a car. It is typically expressed as a percentage of the car’s price. The all-in downpayment, on the other hand, includes not only the initial payment made towards the car’s purchase but also other fees such as insurance, registration, and chattel mortgage fees.

Importance: A higher down payment reduces the loan amount, potentially lowering monthly payments and the overall cost of the loan. It also makes you a lower-risk borrower in the eyes of the lender. For instance, if a car costs PHP 1,000,000 and you make a 20% down payment (PHP 200,000), you only need to finance the remaining PHP 800,000, which reduces your interest payments and monthly obligations.

An all-in downpayment is only an extension of the former. It further simplifies the car buying process by bringing various costs under one roof, thus making it easier for the buyer to understand the total upfront cost. For example, if a car's price is PHP 1,000,000 and the all-in downpayment is PHP 200,000, this amount covers not just the down payment but also insurance and registration, which are separate expenses.

Equity

Definition: Equity is the difference between the car’s market value and the outstanding loan balance. There are two types of equity - positive and negative.

Importance: Positive equity means the car is worth more than what you owe for it to the lender. It is a positive scenario, especially when you plan to sell or trade in the car. Negative equity, on the other hand, means you owe more than the car's current value, which in turn complicates sales or trade-ins.

Insurance Premium

Definition: The insurance premium is the total amount paid by the insurer for the coverage offered by the insurance policy.

Importance: Now, car insurance is essential as not only does it offer protection from future financial liability on your investment, but it is also legally required. In the Philippines, while Compulsory Third Party Insurance is mandatory by LTO, Comprehensive insurance coverage is a choice that offers a wide range of coverage, including theft, natural disasters, and accidents. The premium paid depends on several factors, including the car's value, driving history, and coverage level. We’d always suggest looking around and comparing policies to find the best coverage at a reasonable price.

Chattel Mortgage

Definition: A Chattel mortgage is a loan agreement wherein the vehicle serves as collateral for the loan.

Importance: Common in the Philippines, a chattel mortgage protects the lender by allowing them to repossess the car if the borrower defaults on the loan. This type of loan often includes a chattel mortgage fee, which can add to the overall cost of ownership. Therefore, it is very important to understand the terms & conditions related to the mortgage, to avoid unexpected costs and events.

Rebates and Incentives

Definition: Rebates and Incentives refer to the discounts or benefits offered by manufacturers or dealers to encourage car sales.

Importance: They can significantly reduce the purchase price of the car. Common incentives include cash rebates, low-interest financing, and special lease deals. Always inquire about available rebates and incentives, as they can vary by model, dealership, and time of year.

LTO Fees (Land Transportation Office Fees)

Definition: The LTO fee is the mandatory fee paid to the Land Transportation Office for vehicle registration, licensing, renewal, and others.

Importance: These fees are necessary for legally operating your vehicle in the Philippines. Make sure to budget for these recurring costs, as failing to pay these fees can result in penalties and legal issues.

Balloon Payment/Residual Value

Definition: A balloon payment is a large, lump-sum payment due at the end of a loan term after regular monthly payments.

Importance: Although balloon payments can make monthly payments more affordable, the borrower must carefully plan to handle the large final payment. This structure can be advantageous for individuals who expect to have more funds available in the future, such as a bonus or other substantial income.

Depreciation

Definition: Depreciation is the gradual decrease in a car's value over time.

Importance: Cars lose value as they age, with the most significant depreciation occurring in the first few years. Understanding depreciation helps the owner calculate the future resale value of your car. It is to be noted that some cars have better value than others. Therefore, before buying a car, do proper research and choose a car known for low depreciation.

Credit Score

Definition: A credit score is a numerical representation of an individual's creditworthiness based on their credit history.

Importance: Credit score affects a prospective buyer's ability to get approved for a car loan and get a better interest rate. For instance, a higher score will result in better loan terms and interest rates.

Bottom line

New car owners must familiarize themselves with all these terms so that they can make well-informed financial decisions with no hidden surprise waiting to spoil their mood and budget.

Also Read: Uncovering the impact of credit scores on car loans in the Philippines