Should You Buy A Car With An ‘Assume Balance’ Scheme?

6 min read By eCompareMo on October 24, 2017

There has been a recent rise in a new car selling program or scheme called “pasalo,” or “assume balance.”  With pasalo, the seller tries to sell a vehicle they purchased using a car loan. The catch is that the seller hasn’t finished paying off the loan on the vehicle and the buyer needs to agree to take on the loan as well as pay for the vehicle.

The assume balance market is a hot one. Offers of pasalo abound on Facebook through posts and groups that set up potential sellers and buyers.  Just what is this new car trading scheme? Are there benefits to assuming the balance of an ongoing vehicle loan? And what are the dangers?

Pasalo in a nutshell

The idea of making someone assume your mortgage isn’t new, but it has become more prevalent over the past few years. Assume balance is just basically the new buyer paying the borrower a certain amount for the vehicle (in most instances, with the down payment and some of the monthly repayments taken care of) and assuming the responsibility of paying off the rest of the balance until the car loan term ends.

The two parties, in turn, are now bound by a deed of sale, which stipulates the amortization, term of payment, and other things like the renewal of insurance and LTO registration. Once the payment has been completed, ownership will be transferred from the new buyer. Until then, the original buyer’s name is still the one present on the official receipt and certificate of registration (OR/CR).

‘Grab-ready?’

The practice became more prevalent after transport network vehicle services (TNVS) like Grab and the now-defunct Uber started operating in the Philippines. The scheme became even more widespread after the TNVSs stopped their drivers’ incentive programs and a prohibition was placed on the processing of new applicants.

This prompted some drivers, especially the ones who had already purchased several cars through a loan, and registered them to a TNVS, to sell their vehicles and pass on the burden of loan repayment. Cars sold under assumed balance this way have the additional come-on of being “Grab-ready.”

A buyer who purchases an “Grab-ready” vehicle under a pasalo agreement usually does so because they want to earn a living with their new purchase. But it’s not always as simple as just paying the rest of the loan payments.

According to Uber Manila Tips, a help blog maintained by anonymous Uber drivers and patrons, a person who assumes the balance of a vehicle may not register the car under his name because the name written on the OR/CR still belongs to the original buyer

“If your name is still present on the OR/CR and the TNVS application, it means you’re still liable to the unit’s TNVS operations (taxes and if ever, accidents too) and not the new owner because the ownership still hasn’t been transferred to the one who assumed the balance. You’re no longer profiting from the TNVS operations, but you are still the one legally and fiscally liable in the eyes of LTFRB,” according to a blog post by Uber Manila Tips.

If both parties agree to this, then the party that assumes the balance is lucky because the person whose name is found on the OR/CR is still the one who has to deal with all the headaches.

For the new owner to transfer the Grab-ready vehicle to their own account, they will need to create a new Grab peer account under which they can enroll the new vehicle. They will then need to email Grab asking for a vehicle transfer. The previous owner also needs to email Grab to confirm the vehicle transfer request.

Why can’t previous owners just transfer the balance to the next owner? Two words: chattel mortgage.

The fine print

In an article written by Top Gear Philippines legal columnist Robby Consunji, he explains that cars in the middle of an auto loan term cannot simply just be sold to a new buyer. The mortgager must follow the procedure outlines on their Promissory Note with Chattel Mortgage. This is part of their auto loan agreement with the bank.

“In order for you to sell your car, you need to get the prior written consent of the bank. You cannot sell and deliver the mortgaged car to the buyer for that would constitute a breach of your obligation to keep the car at the address stated in the contract,” wrote Consunji.

“That such a transaction has evolved into an industry practice does not mean that it complies with the Promissory Note with Chattel Mortgage. The bank can still object to the transaction, declare a breach of the contract terms, and seek to repossess the mortgaged car from whoever may be in possession.”

Consunji further pointed out that the proper procedure for selling a car currently under a loan agreement will require both parties to secure the written consent of the bank, which will lead to a credit investigation of the potential buyer.

Once the buyer’s creditworthiness has been secured, the mortgagee will now consider the loan pre-terminated and the old buyer must shoulder expenses like “pre-termination fees, cancellation of chattel mortgage, transfer of registration to the bank or buyer, notarization, documentary stamp taxes and related charges.” The new buyer will then engage with the bank to a new Promissory Note with Chattel Mortgage.

Although this may sound daunting, going through the proper procedure will prevent the car owner from becoming criminally liable. Under Article 19 of the Revised Penal Code, the person caught selling a mortgaged property (in this instance, a car in the middle of a loan term) will be slapped with arresto mayor (imprisonment of one month to one day to six months) or a fine amounting to twice the value of the property.

Now what?

If you have a car on loan and you no longer want to burden yourself with the amortization that comes with it, the best way to do so is to pre-terminate your loan and find someone who is willing to go through the proper channels with you. It may incur additional costs, but it’s better than facing lawsuit and having your car repossessed to boot.

Meanwhile, car buyers face a higher risk of being scammed when dealing with assumed balance programs. Just recently, GMA News Online reported that a man who bought a car under the pasalo scheme got his car repossessed just two weeks after paying the down payment. Turns out, the original owner has been skipping payments for the vehicle and the unit was already on the verge of repossession when it was sold under pasalo.

Trading a car in these new markets poses a great risk to both parties. Since a car is a form of personal investment, you don’t want your money going down the drain because of some easy scheme. Read the fine print and check if there are strings attached—or prepare to lose your money in a flash.

If you’re looking to buy a car and cannot afford a new one, you may also want to consider the following options:

• Get a secondhand car instead. Used cars have some advantages over new cars, especially in terms of lower prices. There are tons of secondhand car sellers around like online ad postings for used cars or dealerships that specialize in selling pre-loved rides.
• Visit dealers for certified pre-owned cars. These are late-model units that underwent inspection and refurbishing by the manufacturer. They’re offered at lower prices than brand new ones and usually sold with special financing to attract buyers.
• Save for a brand-new car. If you cannot snag an auto loan because you cannot cover the down payment, consider saving up for a while first before you even consider buying a car. A new vehicle comes with all the perks you need (including that sweet smell of a fresh car) minus all the headaches.