An ability to avoid mistakes in finances is what differentiates those who are earning interest from years of savings and those who are locked into paying debt for the next five years or so.
You came here for a solution and not a reminder of the good reality or the sad fate.
Do something today, such as creating a thing, or working on a job, which you can thank yourself in future.
Take the step to avoid a financial mistake, and you will have done the equivalent of working to correct the mistake in future.
- Avoid getting into debt to buy a car right now.
- Save for a year.
- Get the car by paying cash.
- The rest of the three years or four years you would spend in debt are worth something else.
You will thank yourself when you get the car for cash.
You will thank yourself for the decision you too just now.
The hidden charges of car loans in Kenya
People who use bank financing to buy cars through an arrangement by the car dealer in Nairobi end up also losing money in the following ways, other than the interest.
You have to pay 2.5% of the loan amount as facilitation fee. If a bank like stanchart, nic, stanbic, kcb, equity etc is offering the loan.
You have to pay Ksh 3000 or thereabout as facilitation fee for the loan
You have to pay the price at about Ksh 100,000 extra because the seller is taking advantage of your lack of cash. (You cannot bargain the buying price)
You have to pay for tracking, from a pre-approved supplier. It will be about Ksh 28,000 for 4 years, which is the duration of your loan.
You have to pay for depreciation indirectly. The car will lose at least 30% of its value as soon as you drive away from the used car yard, or the new car show room.
You have to pay for comprehensive insurance, at about 4% the value of the car.
Here is the math. If you are to buy a car such as Mazda demio, which is popular in Kenya because of the Uber business in Nairobi, then you will lose about 150k before accounting for interest payments.
[You paid higher for the purchase + comprehensive insurance + loan processing + tracking + facilitation fee]
Illustrative Example – Buying Mazda Demio
Alternatively, you can save to about ksh 350k and buy a Mazda demio, the previous generation, and get to drive it for another Ksh 60k to 80k with few problems other than regular maintenance. Besides, you can get a much cheaper car at Ksh 300k and then spend the extra 50k fixing it up with stuff from other used car available at any Jua Kali garage market throughout the city, if that is what you want.
New (used) car – Mazda Demio (2011)
What you pay by bank financing arranged by car yard dealer:
- Deposit 30% = 225,000
- Facilitation = 3,000
- Insurance 4% = 30,000
- Tracking = 28,000
- Loan processing 2.5% = 13,125
- Principal loan amount = 600,000
- Interest on loan is 14% annually (calculated on reducing balance)
- Total, the least amount you have to pay to leave with the car = 286,000/=
- Do not forget the 13,125 or 2.5% deducted or added to your money due. Thus, your balance is the 600000 loan + interest spread over 48 months
Used Car, Mazda Demio
What you pay with your savings after waiting for a year
- Purchase price 330,000
- Interest = zero
- insurance 4% for comprehensive (optional) = 13,200 or third-party insurance = 7000
- car service ([email protected] each, plugs @1500, oil @2000 – 3000, suspensions (optional) etc.
- Total with all options included = about 363,000/=
The difference between what you would raise before getting the car on loan and what you would pay to get the other used car is about Ksh 77,000 give or take.
Of course, if you are getting the car, and the owner is true to his/her word that it is a buy, fuel, and drive, then you will pay close to 335,000 for the used car. And the difference in this case drops to 49,000 only.
Now think hard and good about raising Ksh 286,000 to get the bank financed car, and struggle with about Ksh 14,000 as monthly payment for the next four years. In that period, your counterpart, the person who went with option B, will have probably also spent or saved a similar amount of a monthly basis. If her or she saved, then she will be about 600 in positive net worth & you will be at zero having cleared your debt.
The high mileage question
The financed car will likely be anything between 40,000km to 90,000km while the used car bought on cash at that price is likely about 140,000km to 160,000km. You can use the car comfortably for all the kilometers before 200,000k. The Mazda Demio in particular is a strong and well-built car and it can go to 300,000km with tender loving care.
Do not finance your car. Save and buy cash. Cash is king in many ways. You avoid many hidden charges. You get a good car whose depreciation is not as much as the newer car.
You are free to do what you like with the 14,000 monthly savings arising from your wise financial decision.