The global finance industry may be shaky, but getting a car loan in Nigeria appears not to have been affected.
The number of financial institutions offering loans for acquiring new or used cars keeps increasing but what does this mean for the borrower?
Car loans, as with other types of loans, come with their advantages and disadvantages.
Using a loan to buy a car may ease your transportation burden but, in the long run, may lead you to a trap if you are not careful.
What is a car loan?
A car loan, also known as an automobile loan, or auto loan, is a sum of money a consumer borrows in order to purchase a car. Car loans follow most of the same rules and procedures that apply to other loans.
In most cases when purchasing a car, a borrower will specifically apply for a car loan; however, a consumer can also use a personal loan, a loan obtained by an individual to use at his or her discretion, for the same purpose.
All car loans are for specific lengths of time, generally anywhere between 24 and 60 months, although some car loans can be for longer periods. This type of loan is also known as financing.
Car loans generally include a variety of fees and taxes, which are added to the total loan amount.
Car loans can be obtained at the local bank or at the car dealership.
How Do Car Loans Work?
A car loan can help make buying a vehicle more affordable by breaking up the cost into monthly payments over a period of time. Auto loans typically come with repayment terms of 24 to 84 months, depending on the lender. How much you’ll be able to borrow will depend on the vehicle and your financial situation.
The payments you make on an auto loan will go toward your principal loan amount as well as the interest charged by the lender. Your overall interest costs will depend on the interest rate you qualify for. In general, the higher your credit score, the better your rate will be. Many lenders also offer lower rates to borrowers who opt for shorter repayment terms.
Things to keep in mind before taking a car loan
Before opting for a car loan, there are things you need to keep in mind to be sure that you are on track.
Getting a car loan in Nigeria may have become more seamless than it used to be but it is always advised to arm yourself with the right information.
Below is some information you need to keep in mind before taking that car loan.
First, it is important to get an idea of your eligibility. For this, you can use available loan calculators to see how much you can borrow.
You should also monitor your credit score to know how well you will fare in getting your loan approved. A credit score of 750 and above means you can get a car loan at competitive interest rates. In case your credit score is low, you can look to improve it if you check it earlier.
Do your due diligence before zeroing in on a loan. Loan deals from car dealers may not be the cheapest.
You should approach your bank because you already have a relationship with them, but you should also check with other banks or financial institutions.
Also, check offers by finance companies and possibly, car dealerships too as some of them are known to broker car loans for willing borrowers.
Set a budget
Before applying for the loan, decide on the loan amount you desire. This means setting a budget. The budget is not just the price of the car. It also includes other fees like registration costs, insurance premiums, and the cost of car accessories.
It’s easy to get convinced by the pushy salesman and finalize a model or variant beyond the pre-decided budget but remember that it will get added to your overall cost.
Understand the tenure and other terms
Understanding the terms of the car loan, especially the tenure, plays a critical part in the entire process.
A five-year loan for instance will mean lower monthly installments than a three-year loan. But it will also mean that you’re paying a lot more money as interest.
Remember that going forward, your expenses may increase. Considering your income and present expenses, you need to assess how you can manage upcoming commitments during the loan tenure.
Advantages of car loans
When it comes to taking out a car loan in Nigeria, there are various benefits. Some are more obvious than others though, and how you rank them will depend on what getting a new vehicle means to you.
Some of the advantages of taking a car loan in Nigeria include;
Ease of repayment
Not everyone has access to bulk money. With a car loan, you can easily spread the cost of repayment without feeling the pinch.
Saving up to buy a car can take years, and you may not be in a position to wait that long. While trying to save for a car, other factors like inflation keep posing challenges.
On the other hand, spreading the cost of a vehicle over a few years allows you instant access to the car, without needing to save up.
Drive a better, more reliable car
With the obvious economic challenges, saving up to buy a brand-new car may not be immediately possible. Also, buying a fairly used car, or what is called ‘Tokunbo’ does not come with guarantees.
Chances are, it would be on the cheaper end of the scale and may end up becoming expensive to fix.
With a car loan, you a guaranteed a more reliable and newer model of car that generally comes with exciting new features, and is often cheaper to run!
Easily fit into your budget
There are a lot of options with car finance – whether you’re looking to get a Hire Purchase or a Personal Contract Purchase agreement, you should be able to find something that suits your budget.
As you’ll be making fixed monthly payments, you’ll be able to factor these payments into your monthly expenses and ensure that you’re not overspending.
Improve your credit score
A hidden advantage of getting a car loan in Nigeria is that it can help boost your credit score. Your credit score is calculated using the information on your credit file, which contains details about any loans or other forms of credit you’ve taken out.
Making timely payments on your car loan will demonstrate that you’re able to manage your money well, and your credit score should improve accordingly.
This means that if you want to take out further credit, you should be offered better interest rates, and have a higher chance of approval.
Five reasons car loans in Nigeria are a bad deal
There are a number of reasons why car loans are generally considered a bad idea. While owning and driving a car comes with considerable comfort, here are 5 reasons one must consider before taking a car loan:
You can call it the ‘tokunbo’ effect, but when a car starts to depreciate, it most likely becomes a liability. Depreciation is just another way of saying that something loses value over time.
Depreciation for cars is steep. When you purchase a new car, the second you drive it off the lot, it has lost a good amount of value. Imagine taking a loan to the tune of millions of Naira and losing it.
That is what taking a car loan almost feels like. The average car loses about 25% of its value in its 1st year, and nearly 50% of its value in the first 3 years.
Different cars depreciate at different rates, but the point is borrowing money for a depreciating asset is almost always a bad deal.
Unlike personal loans or payday loans, car loans are usually long-term. Generally, long loan term loans are considered a bad idea.
On average, a car loan in Nigeria has a life span of about 48 months. That’s four years. The longer the car loan, the more interest you pay, and the more likely it is that you’ll default on your loan, meaning that you owe more on the loan than the car is worth.
Similar to depreciation, it is also a credit risk to have car loans. Within a 5-year span, it’s very likely that you’re going to have at least one major financial emergency.
It could be a job loss, a health emergency, home repairs, car repairs, or even a combination. If you’ve ever been in a situation where money is tight because of an emergency, the last thing you want is a monthly car payment.
Taking a car loan in Nigeria makes dealing with a financial emergency much more difficult. When you’re in a cash crunch during those times of emergency, it’s much more likely that you’ll damage your credit by missing or being late on payments.
Expensive interest rates
Car loans in Nigeria aren’t exactly cheap, and though banks and other financial institutions now offer them, accessing them can be difficult due to prohibitive credit criteria and high-interest rates.
For car loans, banks in Nigeria lend at rates between 18% to 30% per annum compared to an average interest rate of less than 5% available for a 72-month vehicle financing scheme in the United States.
Getting a loan from commercial banks in Nigeria also comes with a lot of paperwork and processes, making their approval rate very low, at about 20%.
Microfinance banks, on the other hand, are less strict with requirements, as opposed to larger banks which are more focused on mid-to-large corporate clients. Several microlenders have developed vehicle financing programs, which take the asset as collateral. However, they are still not able to offer car loans at significantly lower interest rates.
Risk of losing the vehicle
As car finance is a type of secured loan, if you’re unable to keep to the repayments, you do have the risk of the vehicle being repossessed.
Defaulting on the agreement will typically mean the lender will look for other ways to reclaim the loan value. Overall, with a car loan, you have to make sure you can comfortably afford the monthly installments, or risk losing the vehicle.