Good news! A auto loan with collateral is one of the easier auto loans to avail if you choose to apply for one. Approval for any loan is…read more >>
What is a Collateral Auto Loan?
Good news! A auto loan with collateral is one of the easier auto loans to avail if you choose to apply for one. Approval for any loan is not always guaranteed of course, however, using collateral may increase your chances.
Collateral is simply made up of goods or equipment that you personally own and that can be put down as security for your loan. To describe it further; using collateral is the same as you saying to the bank or lender: “Hey Mr Bank, I need a auto loan of P500,000. My family owns our home in Pasig and the home is actually worth P2million. So, if I ever can’t repay my auto loan, don’t worry… we can use our house as security.” This is a simple explanation but hopefully it helps describe what collateral is and how it works for the purpose of obtaining loan.
Collateral for a car loan (or ‘auto loan’) can also be obtained by the bank in the form of the new car itself, in this example, when you purchase the new car from Honda, Toyota or whoever, the lender will use your car as security for the loan. Therefore, if you are unable to repay your car loan for an extended period of time and it is unlikely you will ever catch up with the repayments, the lender has the legal right to assume and take on ownership of your new car. The lender will then sell your car to a new owner and use the money from the sale to pay for the remaining amount of your loan.
These two examples above are general in nature and before you agree to a collateral loan with any lender or bank, be sure to read the terms and conditions to find out exactly how your collateral will be affected.
Many of the big banks in the Philippines will not approve a loan application that is using collateral from a car that is over 2 years old. One example of this is Philippine National Bank (PNB). The reason for this is perhaps that the older any car gets, the more it depreciates in value. Therefore, it will be difficult for the bank to resell the car for a good price. It is believed that a new car will lose up to 20-30% of its new value within the first 2 years of ownership. Don’t be mad at the banks, they are in business to make money of course.
If you have strong confidence in your ability to repay a car loan than using collateral may be a good option for you. You need to consider that worst case scenario though and really decide with your family if using something as important as your house as collateral is worth obtaining the car loan.