Whether you’re in the market for a new car or are ready to upgrade your old one, getting a motor vehicle loan can be a challenge. However, with some planning and a few tips, you can save time and money by choosing the right financing option for your budget. More often, when it comes to financing a new or used car, choosing which one is right for you will depend on many factors, including your budget and the type of vehicle you want to purchase or upgrade. Owning a car or upgrading your current model, can be achieved through acquiring a personal or a car loan.
Differences between Personal and Car Loans
The most obvious difference between personal loans and a car loan is that, personal loans are unsecured loans, whereas auto loans are considered secured loans. Personal loans can be used to finance any type of purchase or expense, for example weddings, home repairs, furniture and electronics, a new or used car. If you want a more flexible loan, depending on your need at hand, a personal loan is a good choice.
Car or auto loans, on the other hand, can only be used to purchase a vehicle and nothing else. This type of loan requires a down payment, or a percentage of the value of the loan, and a larger down payment on a loan means having a lower principal to pay off later on. Auto loans are backed by collateral — in this case, the car. If you do decided to go with an auto loan, a lender can seize your car if you default on your payments. If you also fail to make payments on a personal loan, your credit score will take a hit and the lender could pursue legal action — which could eventually lead them to seizing your assets, including your car. Personal loans and car loans can both be financed through lenders, credit unions and banks.
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Before we talk about choosing the right financing option that suits your budget, lets dive into factors to consider that can get you to drive away with your dream car or an upgrade.
– Get Preapproved: Financing your motor vehicle can be as simple as calling a bank or credit union and requesting a preapproval for a particular amount. Typically, these banks and credit unions will review your income, debt levels, credit rating and other details to determine your loan approval.
The bank or credit union will then send you a letter that confirms your loan amount and interest rate. This can give you peace of mind when it comes to negotiating the price of your vehicle and the terms of the loan. You can also find lenders who offer preapproval services online or at your local bank or credit union. These companies may not be affiliated with auto dealers and can help you compare rates, fees and other terms.
– Use your savings or credit cards:
Buying with a personal loan or credit card is an excellent way to finance a vehicle. If you have a good credit score and a steady income, it’s possible to qualify for a low interest rate with these options. You can also lower your overall car financing cost by putting down a larger down payment or using a loan that uses your car as collateral.
Keep in mind that these options aren’t always the best ways to finance a vehicle and that the interest rates they offer can be higher than other types of loans. For example, some bank and credit unions have special loan programs for people with bad credit. These programs often have low-interest rates and special requirements, such as a high deposit or a short term contract.
– Negotiate Your Motor Vehicle Financing:
Another option is to negotiate your loan with the dealer directly. This can be an effective strategy if you are able to get the dealership to reduce their sales commissions, negotiate down on the vehicle’s price or offer extra incentives like cash rebates or special financing packages.
This is a great strategy for people with low credit scores or people who want to buy a new car that’s out of their price range. You can usually find a buy-here-pay-here dealer who offers financing for cars with bad credit, but it’s important to be aware of their reputation and the type of car you’re purchasing.
– Compare Prices: If you’re in the market for a brand-new vehicle, look for manufacturer incentives or special deals that may be available. They’re often advertised as 0% financing or cash rebates and can be a great way to lower your cost of financing a vehicle.
– Consider Leases Versus Purchase: Leasing is a popular choice for many buyers because it allows them to drive a new vehicle without having to pay a significant down payment. It’s also a good option for those who want to drive a high-end vehicle but can’t afford the up-front cost. In addition, leasing may be the most affordable option for people with a lower credit score and less income.
– Financing requirements and costs:
There are a few key financing requirements and costs you should be aware of, before you make a decision. These include interest rates, eligibility requirements, loan repayment terms and car age. Using an online car loan calculator can help you make the best choice for your needs.
• Interest Rates and APR
The interest rate that you pay on your loan will vary depending on your credit history and other factors. This is why it’s important to compare the different terms and rates available from multiple lenders before making your final decision.
• Car Loan Repayment Term:
The term that you choose for your auto loan will have an impact on the amount you pay and how long it takes to pay off the total debt. Shorter terms can save you money on interest, but longer terms will definitely cost you higher interest payments.
• Loan Requirements and Eligibility:
You’ll need a good credit score to qualify for an auto loan, and it can be difficult to find one if you have poor credit. You also need to be able to demonstrate that you can repay the loan.
• Age:
If you’re looking to buy a new car, many manufacturers offer favorable dealer financing terms. However, this isn’t the case for older cars or fixer-uppers. In these cases, a personal loan may be your only option.
• Down Payment:
An auto loan requires a down payment, which is a percentage of the overall value of the car you’re financing. This is because the lender doesn’t want to lose their money if you default on the loan.
Lenders typically have limitations on the type of vehicles that they finance, so it’s important to shop around for a lender that is willing to work with you on your particular situation.
• Repayment:
Generally, the repayment term for a car loan is between two and seven years. During that time, you’ll need to make regular payments or risk losing your car to the lender.
• Ownership:
The car title belongs to the lender, so you can’t sell it without their permission. This can be a major drawback for some people.
• Predatory:
Some buy-here-pay-here car lots offer predatory lending terms that can trap you into a cycle of paying a lot of interest on the loan while not being able to pay it off in full.
• No down payment:
The biggest advantage of using a personal loan to buy a car is that you won’t have to make a down payment. This can be especially beneficial if you don’t have much saved up to put down on a vehicle.
Both personal and car loans come with their own unique set of advantages and disadvantages. The best way to determine which one is right for you is to use an online loan calculator to crunch the numbers and see what makes the most sense for your situation.
Choosing the right motor vehicle financing
It is exiting or even overwhelming just the thought of imagining yourself driving, or owning the car of your century, or even an upgrade that can quench your car thirst! It is important that the above discussed factors and requirements be put into ultimate consideration and carefully arriving at a suitable financing option decision that will have you enjoy your car and at the same time pay for it peacefully. Let us get to know what the experts have to say about what you have been thinking, whether it’s time for you to own or upgrade your current car, their views could probably be an eye opener for you or even unstuck you from procrastinating or doubting your ability, to helping you, make that informed and meaningful decision that you will live to be happy about.
“Always be keen on the cost of Money you are taking. That is the interest rate and other related charges like processing fee, credit life insurance and tracking. Make sure you read every letter of the offer letter given before signing,” emphasizes Gitonga Kigo, C.E.O at Karura Community SACCO.
“The car should be able to meet the minimum Year of Manufacturing threshold for financing. It is also paramount to know if you qualify for the loan facility prior using your income statements or payslip. Always go for a monthly repayment that is within your budget with a competitive interest rate and does not attract unnecessary charge/s for early repayments,” counsels Daisy Magu Snr. Marketing & Business Development Manager at Safaricom Sacco Ltd.
According to James Karinga, Head of Asset finance and IPF at NCBA, “The advice I would give to a customer seeking the right financing option is to consider the following
- The purpose of the unit I would like to acquire. Is it for personal or commercial use?
- I would evaluate if my cashflows are sufficient to cover the loan repayment.
- I would seek to understand the various financing options available including: Can the financier advance money against a logbook I hold? Are they willing to give me a minimal grace period? Can I get additional financing for expansion? Is the pricing competitive? How is the borrowing experience from start to end? How experienced is the financier?
“Choose a financier who will be able to answer all these questions and walk with you throughout the financing journey,” adds James.
“The cost of a motor vehicle will typically determine financing options available to a potential customer. Sourcing an affordable motor vehicle therefore, significantly reduces the cost of financing – making the purchase more financially feasible. One way to achieve this is by exploring alternative sourcing strategies, such as directly importing vehicles from source markets e.g. Japan,” recommends Kawira Irambu, Brand and Strategy Manager at MOMENTUM Credit Ltd.
“The cost of financing (i.e. interest rate, fees, applicable taxes etc.), loan term, lender’s reputation, percentage of asset financing, limitation on funded vehicle models and authority within the asset financing/motor vehicle category, are additionally useful checks influencing affordability, and how well the unit purchased meets the buyer’s needs. If upgrading from an existing vehicle; a trade-in is advisable. This typically reduces financing costs with the owed unit acting as a down payment therefore lowering monthly payments and shortening the loan term,” adds Kawira.
Conferring with, John Ndichu, Head of Asset Financing, at Absa Bank Kenya PLC, choosing
the right financing option for a new or upgraded motor vehicle, is a significant financial decision. When choosing the right financing option, one needs to take consideration of the following:
- Evaluate your financial situation by considering your income, expenses, and overall budget to determine how much you can afford to spend on a vehicle and how much you can realistically afford in monthly installments.
- Consider the total cost of owning the vehicle, including maintenance, insurance, and fuel costs. This can help you determine the true cost of owning the vehicle and ensure you can afford the payments over the life of the loan.
- Take your time, compare different options, and make an informed decision that aligns with your financial situation. Go for tailor-made solutions suitable to your need, whether for personal or commercial use. If you’re unsure about the best financing option, consider consulting with an expert or an automotive financing specialist, who will provide personalized guidance based on your specific situation and financial goals to get you started on your car ownership journey.
Not all auto loans are the same. The option that will best serve your financial needs and budget will depend on if you want to buy a new car, used car or an upgrade. Before deciding which type of auto loan is best, do your homework to understand what each has to offer. Also, shop around to find the best lenders and get pre-approved to ensure you score a competitive financing offer.
