Car Financing 101: Everything You Need To Know About Car Loans In Kenya
Buying a new car is one of the biggest purchasing decisions you’ll make in your life. Whether you’re buying a brand new, foreign-used, or locally used car, you’ll be making a very significant investment (and probably forking over a lump sum of cash in one go). But what if there was a way to drive out of a car dealer’s yard with your favorite car while still saving on the initial costs of car ownership? This is where car financing comes in.
Before you sign off on a car loan, it’s important to do your homework and understand what car financing entails. Read on for everything you need to know about car financing.
What is Car Financing?
Car financing, or a car loan, is a type of loan you get from a financial institution in order to buy a vehicle. A lender loans you the money you need to buy a car and you’ll pay it back in installments over a period of time. While many personal loans are usually unsecured, car financing is a secured loan with the car itself serving as collateral.
Car financing has become an important aspect of car ownership in Kenya. It offers you flexibility and helps you to spread the initial costs of buying a car over a period of time.
Key Car Financing Terms to Know
Before we get into detail about how car loans work, let’s get familiar with some of the most common terms you may come across as you explore loan options. We’ll call them the building blocks of a car loan. They are the main factors you should consider before you sign off on a car loan. They include:
- Loan Costs: A car loan consists of the principal and interest. They make up the overall loan costs. The principal refers to the negotiated cost of the car while the interest is the costs accrued on the principal of the life of the loan. Depending on the lender, your loan costs may also include fees such as a loan processing fee (origination fees).
- Interest Rate: The interest rate is the amount a lender charges a borrower and is a percentage of the principal. It is the cost of the debt to you. Most lenders charge the interest rate annually (annual percentage rate- APR) but some, especially microfinance institutions, charge monthly interest rates for car loans.
- Down Payment: This is the upfront payment you make for the purchase of the vehicle. The larger your down payment is, the less you need to borrow. Some lenders give 100 percent financing while others require a fixed down payment or a certain percentage of the car’s value.
- Loan Term: This is the period of time you’ll have to pay off your loan. The longer the loan term, the more interest you’re likely to pay. Loan term is also referred to as the loan duration.
You should also find out the monthly payments you’ll be expected to make while servicing your loan.
Requirements for a Car Loan in Kenya
To find a car loan, you’ll typically need to complete a loan application form that provides information about your financial status and attach a few supporting documents. Some of the documents you’ll need to provide when applying for a car loan include:
- Your national ID or passport
- KRA Pin Certificate
- Copies of the three latest payslips
- Certified copies of the last six months’ bank/ Mpesa statements
- Initial letter of employment or contract
- Copy of the car logbook or import documents
- Drivers license
The lender may also ask for a credit report to assess your creditworthiness. A lower credit score doesn’t necessarily mean you won’t get car financing, but your loan terms and approval may differ. You can get a car loan with bad credit, but with higher interest rates.
The Benefits of Buying a Car Through Car Financing
Should you take a loan to buy a car? When it comes to car financing, it’s important to weigh the pros vs the cons before making a decision. Buying a car through financing comes with a lot of benefits, such as:
- You can get a car as soon as possible to solve your urgent needs. Most lenders can advance you a car loan within 24 hours, as opposed to saving to buy a car in cash.
- Car financing frees up your cash flow and you can save your money for rainy days, car maintenance, or make profitable investments
- It’s easy to budget and spread out the costs of buying a car
- You can borrow the full amount of the car’s purchase price
- Unlike personal or business loans, car loans have much friendlier terms as the vehicle itself serves as loan security
The Cons of Buying a Car Through Financing
If you’re not willing to wait for years to own a car, taking an auto loan may be your next best option. While taking a car loan can be a wise financial move and sometimes even beat the idea of buying a car for cash, it comes with its drawbacks.
Some of the cons of taking a car loan include:
- You’re at risk of losing the car in case you default on your loan repayments
- You end up paying more for the car overall. The process of car financing involves extra costs such as loan processing fees and the cost of installing a car tracker.
- You own the car jointly with your lender until you finish paying off your loan
- Many car finance companies have an age limit for vehicles on which you can get a loan. It can therefore be difficult to get a car loan if you’re into antique cars (cars older than 20 years from the year of manufacture).
But car loans are not all gloom and doom. With research and due diligence, you can find the right car loan that matches your financial needs and expectations. Which leads us to the next question:
Where Should I Get my Car Loan?
It’s a good idea to shop around for the best deal when looking for a car loan. In Kenya, there are three major sources of car financing- bank financing, microfinance institutions, and SACCOs.
1. Bank Financing
Banks are the most common providers of car financing in Kenya. This is mainly because they usually have lower interest rates (between 14 and 18 percent per year). The only downside to bank car loans is that they have strict requirements and loan approval may take time. But if you have a good credit history and don’t have a history of defaulting on loans, it’s an appealing option.
Apart from lower interest rates, the other benefits of going directly to your bank for a car loan include:
- Being a bank’s existing customer will help you to get faster approval
- A down payment isn’t always necessary to get approved
- You can get prequalified well before you even start shopping for a car which gives you more buying power when you walk into a dealership
- Banks rarely mark up the interest on their car loan facilities
- Some banks also have insurance services that can help to lower your car insurance costs
2. Microfinance Institutions
You can also obtain a car loan from a microfinance institution such as Mogo and Hakki among others. While microfinance companies have less strict loan requirements and process your loan faster, they have the highest interest rates among the three. Microfinance car loans usually attract interest rates of at least 2.5 percent per month (30 percent per year).
Besides speed and less strict approval requirements, the other benefit of a microfinance car loan is that you don’t need to be a member of the institution to qualify for a loan. You can simply walk in, apply for a loan, and get money to buy your dream car.
They are also likely to offer longer repayment periods.
You can read a detailed guide on how to apply for a car loan from banks and microfinance institutions on Money254.
3. SACCOs
Saccos probably offer the cheapest car loans among the three options. But just like banks, they also have strict loan approval requirements and take relatively longer to process. You also need to be an active member of the sacco to qualify for a loan.
Additionally, the loan is mostly limited to three times the amount of savings you have with the sacco. For example, if you need a Kshs. 1,500,000 car loan, you should have saved at least Kshs.500,000 with the sacco.
Different saccos have different requirements and loan approval processes so you should consult your sacco if this is the option you choose.
Need to Finance a Car?
Do you see a car you like on our listings and would like financing to buy it? We’d be glad to help! We can link you up with our financing partners for locally used car loan rates. Reach out today with the car in mind.
