Wananchi Opinion: Planning to buy a car on loan? Here is what you need to know

Purchasing a vehicle is without a doubt a big decision, not only do you want a vehicle that meets all of your requirements but also one that is reliable and inexpensive to maintain or own.

The next hurdle to overcome is deciding how you are going to pay for the vehicle. One option includes saving up and purchasing a car with cash, the other might be to apply for a vehicle finance agreement.

Buying a car on loan for personal use has its pros and cons. The pros are as explained below.

You can get a car as soon as possible to solve your urgent needs. When you urgently need a car for convenient traveling with your family, to facilitate your side business, or to help you get to work earlier but you're low on cash, taking a loan gives you the chance to get your car soonest.

No need to save for years. Saving for a big purchase such as buying a car could mean years of saving and a high saving discipline if your income is on the lower side.

Without a savings buffer, you may find yourself digging into your car savings on rainy days, delaying your goal of becoming a car owner.

You can consider saving for a few months to make a large down payment on a car loan, instead of struggling for years to save the entire car purchase amount.

Making a reasonable down payment may qualify you for an affordable, low-interest loan and you can drive your dream car sooner.

You can get 100% financing on a new, more reliable car. Many cash buyers likely buy older and cheaper car models. But older cars are generally less reliable.

For example, if you buy a car with high mileage and little record of repair and maintenance, you could find yourself overspending on repairs, maintenance, and insurance before you even have a chance to enjoy your car.

The cost of repairs may also exceed the car's value at some point and you'll soon discover that you're better off without the car.

There are cases where a dealer may also lie about the history of an old car by, say, altering its mileage to a lower one so you end up getting a raw deal.

Unless you can identify a trustworthy dealer for an old car, you may prefer to opt for a new, more reliable car. New cars are much more expensive but the good news is that some lenders offer 100% financing on new cars, which can be a good deal if you are low on cash and really need a reliable car that will serve you for many years to come.

You can save your cash for rainy days or make profitable investments. Buying a personal car in cash is not always a good idea even when you have the cash ready.

You could end up cash strapped in case of a business or family emergency. Instead of pouring all your savings on a car, you could take out some cash and make a huge down payment so that you're left with a smaller loan to pay and possibly qualify for a lower interest rate.

You may also put the extra money into profitable ventures like rental property or starting or expanding a business.

If the return on your investments is more than your auto loan interest, you could come out on top even if you are paying interest.

You can sell or trade-in anytime. Provided that the vehicle hasn't depreciated below the value that is still owed to the bank, you can sell or trade-in this vehicle provided that all the funds received for the car is first used to settle your loan agreement first and what is left can be used as a deposit on the next vehicle.

Cheaper insurance. In some cases, bank or financial institution that is financing the vehicle will have their own insurance products available.

As a vehicle finance client, you might benefit from lower insurance premiums as opposed to someone that has paid for their vehicle cash.

On the other hand, buying a car on loan comes with a number of unpleasant consequences.

Car value depreciates fast. Your car loses approximately 10% of its value the moment you drive off the lot. If you're financing an older car, the value goes down even faster and you could end up with negative equity, a situation where the loan you owe is much more than the value of your car. 

For instance, if you owe Ksh900,000 on a vehicle currently worth Ksh600,000, then you have Ksh300,000 in negative equity. This situation mostly happens when you make zero or a small down payment or your interest rates are too high.

While you continue to enjoy your car, this negative equity becomes a problem when you lose your income and can no longer make payments. 

You'll not be able to repay the loan even if you sell your car. Lenders may also not want to refinance your loan and you'll have to find extra money to cover the negative balance before you can be open to better financing options.

The overall cost of the car is high. The process of car financing involves lots of extra costs. These costs vary from lender to lender and may include excise tax, car valuation costs, processing fees, late payment fees, disbursement fees, credit life insurance, and the cost of installing a car tracker.

With all these costs combined, it's easy to find yourself paying much more than the cash value of your car.

You may also end up paying very high-interest rates on your car loan, for instance when you make zero or a small down payment.

No modifications allowed on the car. Up until the moment you have fully paid the bank back for your loan, the vehicle is owned by the bank while in use by you.

Thus, as it is not your vehicle yet, you are not allowed to make modifications or add accessories to the vehicle in any way that could impact its value, reliability or usability.

Difficulty in amending the loan agreement. While there are laws that protect the consumer for a set amount of time which allows for the agreement to be amended, after this period, it is very difficult to undo the agreement entered into with the bank.

Thus, if affordability of the installments becomes an issue, you will most likely have to try and sell the vehicle and settle the loan amount as quickly as possible or go under debt review.

A car on loan jointly belongs to you and the lender until you pay your car in full. You have to put up with issues like car tracking imposed by the lender which can limit the way you might want to use your car.

You also risk car repossession when you default on your car payments. Repossession often comes with additional fees to you such as the cost of sending a repossession agent, towing, storage, and auction fees.

All these costs can go upwards of tens of thousands of shillings, interfering with your budget.

If you currently don’t own a vehicle or your vehicle is paid off, acquiring a loan on a car will increase your monthly payments. When thinking about a car purchase, it’s best to look at your budget and all expenses.

Your budget is typically made up of two types of expenses: variable payments and fixed payments. Variable payments shift each month and include costs such as your grocery bills and the cost of gasoline.

On the other hand, fixed expenses remain the same each month. These include your monthly rent or mortgage payments, home and auto insurance bills, and most car loan payments.

It is advisable to ensure that the expected additional expenses of car loan installment payment, car maintenance cost, fuel cost as well as your original personal or family expenses can be catered for by your income before you make your mind to acquire a personal car on loan.

Mr. Abol Kings is a financial coach, a teacher and a former banker.

Email: abolkings1@gmail.com