Assume balance, also known as pasalo, is a type of sale in which a car with an existing auto loan is sold to the buyer on the condition that the buyer assumes responsibility for continuing to pay the monthly amortization until the loan is paid off in full. It's basically selling the vehicle even if the loan isn't completely paid off. 
In this arrangement, the buyer pays a lump sum based on the car's condition, market value, and total paid monthly amortization. This amount is often much lower than the traditional down payment for financing, making it more appealing. Following payment, the buyer then assumes the responsibility for paying the remaining monthly amortization. Though banks discourage this practice, it has become popular despite the fact that auto loans are not assumable per se, making the transaction becomes illegal.
However, what makes the transaction legal is when the seller (or the car owner with an existing auto loan) seeks permission from the lender to arrange such a transaction in order to avoid defaulting on the auto loan. If the lender agrees, the buyer will be subjected to the same credit investigation. They must also submit the same documentation as the original borrower did.

<h2 class="h2-title">Is the assume balance safe?</h2>
Though the "assume balance" is a win-win solution for both the seller and the buyer, as well as the bank, there are some risks associated with this arrangement.
On the seller’s side, it is important to seek permission from the lender before entering this transaction as the lender may sue you legally for selling and removing the vehicle from your premises without their consent because it violates the Chattel Mortgage Agreement, and you'll be the one who ends up with a bad credit rating if the buyer fails to make the monthly payments. As long as you obtain consent, the lender will go after the buyer instead of the seller once the buyer defaults on the monthly amortization.
On the buyer’s side, it is also important to have the lender’s consent as the vehicle can be legally sold to you. To protect your purchase, sign a Deed of Absolute Sale, but make sure it mentions that the vehicle is still mortgaged to the lender and the payment terms. This will allow you to keep ownership of the unit, subject to the lender mortgage, which means you'll assume the seller's remaining loan obligation. Furthermore, instead of sending monthly payments to the seller, agree to pay the bank directly, if possible, thus the payment is not dependent on the seller’s will.
Is it still worth it to enter an "assume balance" sale? Yes, but make sure you comply with all legal requirements. A simple contract of sale will not save you; if it breaches the law, it will be unenforceable in a court of law. Prior to closing the deal, both buyers and sellers must exercise due diligence. It will be safe and lawful as long as you receive the lender's approval with the relevant documentation.

Car owners who are unable to keep up with the monthly amortization of their auto loan would opt for someone else to shoulder the payment of the vehicle instead of losing money when the bank or financial institution exercises its right to repossess the vehicle. They'd rather enter into an "assume balance" arrangement or what they call "pasalo" in the hopes of recovering a portion of the paid monthly amortization. But what exactly is this scheme all about?

What is assume balance or pasalo? Is it safe?

We all know that the covid-19 pandemic has been striking our economy since December 2019, forcing businesses to reduce their workforces or, in the worst-case scenario, shut down operations due to lockdowns and quarantine restrictions. When the pandemic hit, car owners were among the most affected, as their payments were halted. Even though the economy is slowly getting back to normal, many of them are still having trouble repaying their auto loans, and others have already defaulted.
Once you miss payments on your auto loan, expect your creditor to charge you late fees. Furthermore, your creditor will likely charge you interest (normally 5%) on the overdue amount that has accumulated. It can also impair your credit history, making it more difficult for you to secure loans in the future, even if they are unrelated to car purchases. Though creditors do not automatically repossess your vehicle after missing one payment, or even after the three (3) month grace period (which varies by creditors), you still have a chance to avoid having your vehicle repossessed.

<h2 class="h2-title">What options do you have to save your car from being repossessed?</h2>

As previously mentioned, you still have options to save your car from being repossessed by your lender, including:
<ul class="ul-margin1">
 <li>Make up for payments that were missed. If you can still catch up on missed payments, it is better to review the loan contract you signed. Loan terms may vary between banks and other financing companies, some consider default if you missed payment by just one day while others provide you a longer grace period.</li>
 <li>
 Car loan refinancing. In a car loan restructuring or debt restructuring per se, you must negotiate with your bank to modify the terms of your auto loan in order to reduce the burden of repayment, provided that you promise to be able to repay the auto loan after restructuring. This could involve modifying your payment schedule, offering you a longer grace period, or even adjusting your interest rates. 
 <div>Read: <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/blog/car-loan-refinancing-and-its-benefits">What is auto loan refinancing? How would you benefit from it?</a></div>
 </li>
 <li>Trade in your car at the dealership. Consider trading in your car for a cheaper model if you’re still able to make payments but with a reduced monthly amortization. In this way, the value of your car (after deducting depreciation) will offset the value of the cheaper model. While the more affordable model you choose may result in lower subsequent payments, the negative equity created by your old loan being applied to the new loan may result in higher payments. It depends on what you and the dealer can agree on.</li>
 <li>
 Assume balance or “pasalo”. This option requires you to find someone willing to take on the responsibility of repaying the auto loan balance in exchange for money, with the goal of recovering a portion of the loan payments. It's the same as selling a car that hasn't been fully paid for. You can list your car online through a dealer, auction, or classified car website such as <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/">PhilVex</a>.
 <div>Read: <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/blog/what-is-assume-balance-or-pasalo-car-is-it-safe">What is assume balance or pasalo? Is it safe?</a></div>
 </li>
</ul>

All these options may be considered to help your financial recovery. With that said, make sure that you have enough emergency funds before considering purchasing a brand-new car through financing as this will avoid you from missing the monthly amortization.

When you opt to finance your brand-new car, you assume that you’re financially capable of paying the monthly amortization, especially if you have a steady monthly income. However, there are some instances that you might experience financial difficulties as a result of uncontrollable circumstances such as the covid-19 pandemic.

What would happen if you defaulted on your auto loan?

<h2 class="h2-title">What is car refinancing?</h2>
Car refinancing is a debt restructuring for auto loans by which an existing loan is replaced with a new one with different terms, grace periods, or interest rates for the purpose of extinguishing the existing loan due to the financial conditions of the debtor.
Lenders like banks and other credit organizations want to keep your business as much as possible, which is why they are often willing to renegotiate your loan conditions rather than taking a hard line from the start. Any reasonable reason you may present for your financial difficulties will increase their willingness to assist you.
Car dealers would also prefer to retain your car from your possession and to keep your loan up because they collect a share of the interest paid by the lender. If you're unsure whether to keep your financial obligations or default on the loan, contact the dealership where you bought your car and ask for assistance in renegotiating your auto loan with the creditor.
However, not everyone will be eligible for car refinancing. The bank or financial institution will only refinance you if you have a good credit standing. This means that if you are consistently late with your payments or have been found to be a delinquent, you may be denied refinancing.

<h2 class="h2-title">Why is refinancing beneficial to car owners?</h2>
Car refinancing is popular among car owners because of the following advantages:
<ul class="ul-margin1">
 <li>Avoiding car repossession. Having your car repossessed can have a significant financial impact. It can be difficult to go to work if you commute, for example. Damage to your credit score may make it more difficult to obtain credit in the future. That is why most car owners who have defaulted on their auto loans want to keep their cars and opt for refinancing to avoid repossession.</li>
 <li>Lowering interest rates. Some car owners may prefer to refinance their auto loans by looking for a new lender with lower interest rates. In this option, the new lender will pay off the remaining balance of the existing loan and offer you a new loan with lower interest rates provided that the prepayment penalty of the previous loan is less than the benefits of refinancing.</li>
 <li>Reducing monthly payments. Given the impact of inflation, such as increasing gas prices, food prices, and other commodities, some car owners may find it difficult to make car loan payments within their monthly budget. They prefer to refinance the auto loan in this circumstance to lower their monthly amortization. The new loan, on the other hand, will prolong the repayment period while lowering interest rates.</li>
</ul>
While auto refinancing provides car owners with favorable alternatives, be sure not to default on the new loan, as this may harm your credit scores and make it difficult to secure new loans in the future, or it may prevent you from receiving approval for another refinancing.

Have you considered the possibility of not being able to pay your monthly amortization before considering financing a car purchase? What if you lose your job, or you got sick? Because an auto loan is a long-term commitment, you may wonder if there are any risks associated. It certainly has, such as defaulting your car loan payment would result in paying penalties, and interests, as well as, in the worst-case scenario, car repossession.
With that in mind, it's a good idea to know what options you have if you find yourself in financial trouble due to uncontrollable circumstances. One of the options is “car refinancing”.

What is auto loan refinancing? How would you benefit from it?

<h2 class="h2-title">What is a mortgage?</h2>
Generally, [a] mortgage is a legal agreement between two parties, the creditor and the debtor, in which the former lends money to the latter for the purpose of purchasing a tangible property.
In this agreement, the property is used as collateral for the loan if the debtor fails to pay the agreed-upon terms, which are usually monthly over several years. While the lender doesn't own the property in this scenario per se, it typically reserves the right to seize the property if the debtor defaults on the loan. However, upon full payment, ownership of the property becomes the sole right of the debtor.

<h2 class="h2-title">What are the types of mortgages?</h2>
There are two types of mortgages: (1) traditional mortgage, and (2) chattel mortgage. A chattel mortgage is distinct from a traditional mortgage in that the lender retains ownership of the property until it is paid off. The lender isn't the owner of the property with a traditional mortgage, but they do have a lien on it that allows them to take possession in the case of a default. Ownership of the property passes to the buyer at the end of the mortgage term, if all payments have been made.

<h2 class="h2-title">How does a chattel mortgage for auto loans work?</h2>
Chattel mortgages are very common in the Philippines, especially for businesses to purchase new equipment, such as vehicles. Because vehicles have a long lifespan, the bank can spread the loan over a longer period of time, making the payments more affordable for the buyer. Should the loan be defaulted on, the bank retains ownership of the cars at all times. The buyer can utilize the vehicle as if it were their own when using a Chattel Mortgage. In the unlikely event that the buyer defaults on the loan, the bank can repossess the vehicle and sell it to recover their losses.
Choosing a chattel mortgage is a significant commitment that should be carefully considered. It can be a viable approach to acquire if well planned and executed. While there are more requirements and steps than with a regular cash purchase, this does not appear to deter many people, as indicated by the large number of car buyers who have secured auto loans in recent years.

Banks and other financial institutions play a vital role in every county’s economy as they provide loans to individuals and businesses to help them realize their goals, whether personal or business. But, as we all know, they are for-profit businesses since they have investors and/or depositors who are aiming for a return and/or capital appreciation. They must also safeguard the loans they have provided, particularly those that are extremely lucrative, such as auto loans. With that in mind, they create a solution that protects both parties' interests, which they call a "mortgage."

What is a chattel mortgage and how does it work for car loans?

<h2 class="h2-title">Cash</h2>
The most simple and straightforward of paying for a vehicle is to use cash. Paying cash avoids you to pay an additional cost that comes with car financings such as high-interest rates, and other charges. However, there are some cons you must be aware of as this could result in missed opportunities.
Pros
<ul>
 <li>No additional cost to pay. You don’t have to worry about the additional cost of borrowing such as interest.</li>
 <li>You only spend what you can afford. Spending what you have on hand keeps you from going over your budget.</li>
 <li>No auto loan. You owe no money to the bank or any other car financing company because you paid it off in full.</li>
 <li>Outright ownership. Once you paid it, you own it.</li>
</ul>
Cons
<ul>
 <li>It does not enhance your credit score. If you finance a vehicle, you will improve your credit score and be able to earn lower interest rates in the future if you pay your monthly bills early or on time.</li>
 <li>Missed Opportunity for Low-Interest Rate. On a new vehicle, a brand may sometimes offer lower interest rates or perhaps no interest at all. If the buyer loans the car through an automaker-affiliated institution, the dealer may give significant discounts. This is a chance you don't want to lose.</li>
 <li>Early depreciation. Depreciation begins automatically after the car is released from the dealership. If you plan to resell the vehicle on the secondary market in the future, this will have a substantial impact on the selling price.</li>
</ul>

<h2 class="h2-title">Financing</h2>
Car financing gives you flexible options to choose from. There are several banks and other financing services that offer auto loans.
Pros
<ul>
 <li>Easy to get a vehicle. Even if you are on a tight budget, banks can offer you a car loan</li>
 <li>You get the option of getting a better car or a higher trim-level model</li>
 <li>Allows you to pay for your vehicle in installments</li>
 <li>Flexible monthly rates and down payment options</li>
</ul>
Cons
<ul>
 <li>You have to pay the cost of borrowing – the interest</li>
 <li>You don’t own the vehicle until your last payment</li>
 <li>It is difficult to extinguish a loan when you’re in a financial difficulty</li>
 <li>There’s a possibility that your car will be repossessed especially when you missed a series of payments</li>
 <li>It can negatively affect your credit score or rating. This holds true if you miss out on your monthly payment.</li>
</ul>

There are several factors to consider even if you can afford it in cash, some people prefer to take out a loan. So, it depends on your current financial situation. With that in mind, we'll go over some typical circumstances for deciding whether to buy a car in cash or take out a loan:
<ul>
 <li>Use for the Business. If you own a business and a vehicle is required for daily commuting or as part of the operation, such as for Uber or Grab, it is preferable to take out an auto loan. Don’t worry about the interest; you can cover it with your monthly business earnings. Even if your company has sufficient liquid cash, save it for other purposes such as investing it in the stock market, or purchase it in the real properties to earn and expand, and others.</li>
 <li>For Personal Use. This depends on the financial capability and the characteristics of a person. It is advisable to take out an auto loan if you have a steady monthly income (such as an employee). Some employees, however, prefer to pay it in cash since they do not want the burden or hassle of paying the monthly amortization.</li>
</ul>
In general, an auto loan is always better than a cash payment. Purchasing a brand-new car is costly and paying cash for one means passing up an opportunity to invest in an income-generating asset like real estate.

“Why should I bother paying monthly for a car when I can afford it now?” This question is most asked when a person has enough money to pay for a brand-new car in cash. However, it does not always apply to everyone, particularly employees who make just enough to cover their daily expenses and have minimal savings. If you're thinking about buying a car, you'll need to weigh the pros and cons of paying cash or taking out a loan.

Should I pay cash or get a loan to buy a car? Which is better?

Before exploring further into how auto loans are calculated, it's important to first understand the factors that go into this calculation:
<ul>
 <li>Vehicle’s Cost. It is the purchase price of the vehicle when paid in cash. This includes the cost of the vehicle, any relevant taxes, and, in some cases, the registration fee. You must subtract from the overall value the value of any vehicle you intend to trade-in.</li>
 <li>Down Payment. It is an initial payment made when purchasing expensive goods or services. In most cases, a down payment is calculated depending on the rate, for example, a 20% down payment.</li>
 <li>Loan Term. The length of time for a loan to be paid off in full when the borrower is making regular payments. In most cases, the loan term is referred to the number of months to pay.</li>
 <li>Interest Rate. The percentage of the principal amount that the lender charges for the usage of its funds.</li>
</ul>

<h2 class="h2-title">Do the math</h2>
To compute the auto loan, here’s the formula:
Auto Loan = Vehicle’s Cost – Down Payment
where;
Down Payment = Vehicle’s Cost x Down Payment Rate
For example, the car’s price is P1,000,000 and the down payment rate is 20%. So, your computation is:
Auto Loan = 1,000,000 – (1,000,000 x 20%)
= 1,000,000 – 200,000
= 800,000

To compute the interest, here’s the formula:
Monthly Interest = Auto Loan Balance x (interest rate / 12)
In the previous example, the initial loan balance is P800,000, and let’s say the bank’s annual interest rate is 6%. The computation would be:

Monthly Interest = 800,000 x (0.06 / 12)
= 4,000
To stay on the same page, take note that an auto loan is an amortizing loan, which means you'll have to pay back the loan amount plus interest on a monthly basis. Your monthly payments are the same and include both the principal and interest. Each payment will be the same, but when you make more, you will pay more toward the principal and less for interest. It's known as the "Declining Balance Method" in accounting since the principal balance decreases as you make more payments.

<h2 class="h2-title">How to compute your monthly payment?</h2>
As discussed earlier, your monthly payment includes both the principal payment and the interest of the current loan balance. But how to calculate the monthly amortization? We have to use the PMT formula, which is an abbreviation for PAYMENT:
<img src="https://res.cloudinary.com/philvex/image/upload/v1654953922/blog/20220610/pmt-formula_cxzpns.webp" alt="pmt-formula" style="width: 250px;"/>
where;
P = principal (initial loan amount)
r = interest rate
n = number of payments per year (usually 12 months)
t = time in years
Let us say that the loan is payable for 3 years. To substitute from the previous example,
<img src="https://res.cloudinary.com/philvex/image/upload/v1654953922/blog/20220610/pmt-subtitute_tuev5n.webp" alt="pmt-substitution" style="width: 250px;"/>
Note: You need to use a scientific calculator in order to arrive at the exact amount of 24,338, regular calculators don’t work. 
 
Alternatively, you can use the PMT formula in MS Excel:
24,338 = PMT( (0.06/12), (3*12), -800000 )
 
Finally, we arrive at the following repayment schedule using the aforementioned example:
<img src="https://res.cloudinary.com/philvex/image/upload/v1654961167/blog/20220610/repayment-sched_xjvhnc.png" alt="repayment-schedule"/>

As shown in the table, the interest of 4,000 (800,000*(0.06/12)) is applied first to the first month's payment of 24,388, followed by the principal payment of 20,388. The new loan balance is 779,662 after reflecting the principal payment. Every payment repeats the process until the principal balance reaches zero, which exactly occurs on the last payment.

Have you calculated the amount of interest you'll have to pay on an auto loan? Maybe you're just relying on the bank's calculations, or maybe you're looking for a website that offers a <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/auto-loan-calculator-philippines">free auto loan calculator</a>.
When it comes to getting a car loan, you know you want the lowest interest rate and monthly amortization available. However, it is often necessary to understand how the figures are calculated in order to determine whether the loan they are offering is advantageous to you or not.

How to compute auto loan and interest?

Thankfully, auto loans and other forms of financing make it easier to get your ideal car, as long as you meet the qualifying criteria for getting financed. If this is your first time applying for a car loan in the Philippines, here are some tips: <h2 class="h2-title">1. Check the minimum eligibility requirements for getting a car loan</h2>

Before you apply for a car loan in the Philippines, you must first determine if you meet the following minimum qualifying requirements:

<ol class="ul-marginp5" style="list-style-type: lower-alpha;">
 <li>Age. You must be at least 21 years of age but not more than 65 years old at the time the auto loan matures.</li>
 <li>Citizenship. You must be a Filipino citizen either residing in the Philippines or abroad. For OFWs, the beneficiary must be a resident citizen of the Philippines. Foreign nationals residing or working in the Philippines can also apply for a car loan if they have qualifying Filipino co-borrowers/co-makers or if the company they work for endorses them.</li>
 <li>Minimum monthly income. This varies depending on the loan provider, but it normally ranges from Php30,000 to Php50,000 of the entire monthly household income.</li>
 <li>Tenure/Business Status. Employees must have been employed on a permanent or regular basis for at least 2 years. Banks normally approve auto loans for businesses that have been in operation for at least 5 years.</li>
</ol>

<h2 class="h2-title">2. Decide where to get financed for your car loan</h2>

You can now choose where to finance your ideal car once you've determined that you're eligible for a car loan in the Philippines. When it comes to financing your car purchase, you have various alternatives:

<ol class="ul-margin1" style="list-style-type: lower-alpha;">
 <li>Bank Financing Bank financing is a financing scheme that lets you lend a specific amount from a bank so you can buy a car. The borrowed amount will subsequently be paid back in a series of monthly installments over the loan's duration, which is usually between 12 and 60 months. In addition to your monthly installment, you must pay interest on the amount you borrowed from them, which varies between 4% and 20% annually depending on the bank. 
 What's great about bank financing is that you deal directly with the bank, unlike other financing options like dealership financing, which typically charges a commission when you're approved for a car loan, resulting in higher interest rates.
 Banks usually offer you a car loan when they determine that you have established good credit with them.
 </li>

 <li>Dealership Financing Dealership financing is another common type of financing scheme in which car financing is made through car dealerships by a network of partner banks and other lending institutions. Some car dealerships also have their own financing arm (known as in-house financing), which ensures quick processing, free registration, chattel mortgage, and insurance. All these options give you the ability to compare offers including interest rates, and down payments.
 When you get car financing from a dealership, you can usually get special offers like 0% interest (for a year), low down payment schemes, or straight monetary discounts, all of which give you the advantage to make a purchase.
 What is good about this scheme is that it acts as a one-stop shop for car purchases which includes the unit and the financing. However, the disadvantage of this scheme is that you will pay more interest and other hidden charges, which will cost you roughly 4% and 5% more than bank loans.
 </li>
</ol>

<h2 class="h2-title">3. Prepare for the auto loan requirements</h2>

The most typical prerequisites for obtaining a car loan in the Philippines are listed below. This varies depending on the type of borrower:

<ul>
 <li>Locally employed
 <ul>
 <li>Valid government-issued ID with signature and photo such as passport, driver's license, UMID/SSS</li>
 <li>Certificate of Employment (COE) issued by your latest employer</li>
 <li>Income Tax Return (ITR) – usually BIR form 2316, 1700, or 1701</li>
 <li>Latest three months’ pay slip</li>
 <li>Latest proof of billing such as electricity, water, or internet bills</li>
 <li>Duly accomplished form</li>
 </ul>
 </li>

 <li>
 Self-employed (or with Business)
 <ul>
 <li>Photocopy of Certificate of Business Registration for Sole Proprietorship (DTI), Articles of Partnership for Partnership (SEC), or Articles of Incorporation for Corporation (SEC)</li>
 <li>Photocopy of Latest Income Tax Return (ITR)</li>
 <li>Photocopy of Audited Financial Statements for the last two years including Statement of Financial Position (or Balance Sheet) and Income Statement</li>
 <li>Bank Statements or Photocopy of Passbook for the last 3 months</li>
 <li>Valid government-issued ID with signature and photo such as passport, driver's license, UMID/SSS of the owner or the authorized representative</li>
 </ul>
 </li>

 <li>Overseas Filipino Worker (OFW) / Working Abroad
 <ul>
 <li>Latest employment contract authenticated by the Philippine Consulate for OFW or latest crew contract for working as Seaman/Seafarer</li>
 <li>Proof of remittance for the last 3 months or more</li>
 </ul>
 </li>
</ul>

Physical assets, such as real estate and other owned vehicles, can also be used as extra evidence of your ability to repay your car loan, increasing your chances of approval. You only need to show proof of ownership.

<h2 class="h2-title">4. Submit your loan application</h2>
If you want to apply for a loan from a bank, you can do it either walk-in or online. If you want to apply through a car dealership, you can do so by going to the nearest branch and filling out an application.
Using the online facility to apply for a loan is a more convenient choice. Other automotive websites, such as <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/auto-loan-application">PhilVex</a>, also provide quick online car loan applications.
If you choose to apply online, you must scan or take pictures of your documents and upload them to the company's website.

Are you planning on buying a car soon? Perhaps you've already made up your mind about which vehicle you want to buy after conducting extensive research on the internet using sites like <a class="a-link" target="_blank" href="https://philippinevehiclesexchange.com/cars-for-sale">PhilVex</a>.

Unfortunately, not everyone, whether individuals or businesses, can afford to pay for a car in full at once, not to mention the additional costs of insurance and registration resulting from acquiring such a vehicle. Even if you have enough cash, it is impractical, especially for businesses, to withdraw a large sum of money from their bank account when that money could be put to better use.

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