In the Philippines, almost all car buyers are budget-conscious. And it is generally believed that price consideration almost always trumps other factors like brand, styling and standard equipment. And when it comes to pricing, we all think the trick is to either just bring it down outright or offer substantial discounts.
But one factor apparently plays a more crucial role than just the official price tag, and that’s the down payment. This is one of the learnings of Kia Philippines president Manny Aligada in the half year that he has helmed the local distributor of the Korean automaker.
The down payment tends to affect car shoppers’ purchasing decision more convincingly than the total price because it’s the amount that they need to settle up front. In other words, it’s the amount they need to pay before they can drive the vehicle out of the dealership. And that’s the reason several car companies have resorted to low down-payment promos—some even tempt people with 0% down payment—in an attempt to make it very easy for the buyer to make up his or her mind.
But there are risks involved on the part of the distributor if the down payment is set too low. “We’ve found that 0% to 5% is very risky,” Aligada told us during a chat at an industry event. “Those who buy cars at 0-5% down payment have a high chance of defaulting on their monthly payments later on. When the going gets tough, they will easily give the car up because wala silang taya (they have no stake).”
But the seller also can’t set the down payment too high. Otherwise, buyers will go for the offerings of the competition. One has to find the sweet spot in terms of the initial cash outlay. Make it too affordable and you’ll attract poor-quality customers; make it too prohibitive and you’ll lose out on the sales.
In the case of the Soluto, for instance, Kia has determined that the lowest down payment it can demand from the car’s target market is 13%. This figure, Aligada pointed out, is more enticing than the Soluto’s actual selling price (as low as P625,000).
But there’s another factor that can significantly influence a car buyer’s behavior in relation to the down payment. “Owners of vehicles with low down payment but high resale value tend to hold on to the unit because they know they still stand to benefit in the end,” Aligada added.
From where we sit, it’s almost criminal on the part of distributors and their bank partners to keep indiscriminately offering 0% down-payment deals to customers who have no real capacity to purchase and maintain a brand-new vehicle. That’s how you end up with a stockyard full of repossessed cars.
And that’s how you flood the roads with unnecessary cars that only contribute to traffic congestion—all in the name of sales quotas.