Car Finance explained – Advice Guide

21st Oct. 2021 by Dennis Mwangi

Financing a car is the most popular way in Kenya to buy a new car — it allows you to get behind the wheel of something new without having to pay up one large lump sum of cash.

When you buy a new car, you’re almost guaranteed to be offered a finance offer whether buying from a car dealer, broker or car yard.

There are three major options when it comes to financing: Hire Purchase, Car-Leasing or Asset Financing. Some of these options can be a lot to get your head around, so it’s important to understand what you’re signing up for.

The best deal for you will depend on your budget, whether you want to upgrade your car in a few years’ time, and whether you want to own the vehicle outright.

Car leasing & Car Hiring

Who offers it? Car dealerships, Car Yards

What for? New cars, used cars,

How car leasing works.
It is similar to renting a car. You pay a deposit, pay an agreed monthly amount, and get use of the car for the duration of the term. You’ll also have to pay for any damage that occurs during the lease.

Most car leasing agreements run for two to five years, and the deposit is normally equivalent to three to six times the monthly payment. In general, the longer the agreement, the lower the monthly payments.

Most Car Hire/Lease deals are aimed at businesses. For this reason, many deals are priced excluding VAT.
Here’s an example:

• You want a new Toyota Fortuner car worth Kshs 5,200,000
• You put down Kshs 260,000 as deposit – this is equivalent to six months of payments
• You pay Kshs 43,550 a month for 35 months
• After 36 months you pay for any damage, give the car back and walk away
• In three years you’d have paid a total of Kshs 1,785,550 for leasing the car.

Some leasing companies will allow you to switch your lease to another vehicle, but there’s no guarantee the request will be accepted.

Pros of Leasing

• Leasing gives you cost-effective access to new vehicles without the large drop in value that comes with buying a new car outright.
• Delivery, breakdown and a warranty are normally included in lease deals.
• Monthly payments for a similar car tend to be cheaper with Leasing than buying
• You can change car reasonably often

Cons of Leasing

• Deposit requirements tend to be higher than for HP
• You’ll need to have a good credit history
• There’s no option to buy the car at the end, no matter how much you like it
• Lease deals may come with mileage limits – there are financial penalties if you exceed them.
• You’ll have to pay for any damage beyond normal wear and tear at the end of the term.

Hire Purchase (HP)

Who offers it? Car dealerships, Car yards.

What for? New and used cars

How hire purchase works.

HP agreements are pretty straightforward: you pay a deposit (usually at least 10% of the car’s value), and then pay off the value of the car, plus interest, in monthly instalments, over a fixed term. These usually last one to five years.
At the end of the term you’ll pay a ‘transfer fee’ or ‘discharge fee’ to take ownership of the vehicle. It’s important to understand that you won’t own the vehicle until this payment is made – this means you can’t sell it without the lender’s permission since the Logbook is in their name.

Here’s an example of HP:

• The car you want to buy costs Kshs 1,820,000 You put down a 10% deposit of Kshs 182,000 – so you have Kshs 1,638,000 left to pay
• You’re offered a HP deal at 20% Interest Rate (annually) over three years
• This equates to monthly payments of Kshs 72,800 for 36 months.
• After three years you pay a transfer fee of Kshs 3,000 and take ownership of the vehicle
• In total you’d have paid Kshs 2,805,800 (The Kshs 182,000 deposit + Kshs 2,620,800 in monthly payments + Kshs 3,000 transfer fee)

Pros of Hire Purchase

• HP is simple and easy to understand
• You can pick a HP term to suit your budget; the longer the term, the cheaper your payments will be (but the more interest you’ll pay overall).
• Once you’ve made all the payments and paid the transfer fee, the car is yours to keep
• If you have a poor credit history, it might be easier to be approved for HP than an Asset Finance loan.
• There are no limits on the mileage you can do each year

Cons of Hire Purchase

• The car is owned by the Car Yard/Dealer  until the last payment and transfer fee are paid.
• Servicing packages aren’t usually included.
• You can’t sell or modify the car during the HP term without permission from the finance company.
• HP can be expensive compared with other car finance options.
• You’ll need a decent credit history to be offered a competitive HP deal
• If you fail to keep up repayments, the finance company can repossess the car. It won’t need a court order to do this until you’ve paid a third of the total amount

Asset Finance Loan

Who offers it? Banks, Microfinances, Saccos

What for? New cars, used cars

How it works

When you take out an Asset Finance loan from an institution like Karibu Microfinance, you borrow a fixed sum, then repay it in fixed monthly payments, plus interest. Loan terms vary greatly, but are usually from one to five years.

Using a loan to buy a car effectively makes you a cash buyer whether you’re buying a car from a dealer, a car yard or via a private sale.

Asset Finance loans are normally secured by the Car in question. Therefore, your vehicle is at risk if you fail to keep up with the payment. Here’s an example:

• You want to buy a car costing Kshs 1,300,000
• Amount approved is normally a percentage of the value of the car e.g. 70% the value of the vehicle. In this case, the amount approved would be Kshs 910,000 at an Annual Interest Rate of 20% over two years.
• Once the Loan is approved, the financial institution will wire the funds in cheque or bank transfer to your Car Dealer.
• You’ll be paying your financial institution Kshs 53,100 a month for two years.
• Overall, you’ll pay Kshs 1, 274,000 including interest of Kshs 364,000.

Can you end an Asset Finance facility early?

Yes. To pay off the facility early, you’ll need to ask the lender for a settlement figure/balance. The lender will then tell you the amount you need to pay in full. This will be the amount you owe (Principal) and interest up to then plus an early settlement charge if applicable. Lenders Like Karibu Microfinance normally require you to service the facility for at least 3 months for you to settle or end a facility with them.

Pros of an Asset Finance loan

• There is a wide choice of loan providers from Banks, Saccos, and Microfinances.
• You’ll be able to get a competitive interest rate if you have a decent credit rating.
• As a cash buyer you may be able to negotiate a better price for the car.
• You can pay part in cash for your car, and cover the rest with a loan
• You own the car from day one and are free to modify it, drive unlimited kilometres, or sell it.

Cons of Asset Finance Loans

• You might struggle to find an affordable loan unless you have a good credit score.
• Monthly payments might be higher than for some other forms of car finance due to a shorter repayment period as compared to others.
• As you own the car outright, you’ll be responsible for all repairs and servicing.
• The car’s value will depreciate, so it’ll be worth a lot less than you paid when you come to sell it.