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How much will a Car Loan cost me?

Among the different types of loans available, personal loans are the best options for most individuals.
When it comes to getting a brand new or second-hand car, there are multiple options you may consider when it comes to financing such a purchase.

These may include any of the following:

Outright Purchase

If you have enough money on the bank account, you can directly purchase the car in one payment with 100% cash.

Personal Loan

Can be taken to complement your cash savings in order to purchase your new vehicle. This kind of Loan can also be used for many other purposes.

Car Loan

In case you only want to finance your next vehicle, you use a Car Loan, which is cheaper than a Personal Loan thanks to its collateral: the car.

Which Loan is the best choice?

The decision how to finance your car depends on your financial situation. In case you are rich and have enough money for making big investments on your bank account, paying this money outright is the best solution. Why? Because you don't have to pay interest charges and other fees, which are associated with borrowed capital, so you end up paying less in total, if you pay instantly. One drawback though is the fact that you need to plan future investments wisely, as a huge chunk of your cash will be spent on the car. Investing this amount now will leave you with less cash for investments in the future.

A Personal Loan is suitable in case you just need some additional money to finance your car, but the majority is paid with your own equity. Why? Because Personal Loans have more flexible re-payment schemes whereas it gives you more freedom in other aspects, e.g. which insurance type you take or how much you drive per year. If you would like to find out more about Personal Loans, please click here.

In situations where you are not financially buoyant to purchase a car outright or you don't have any savings for you to complement with a personal loan, the ideal option would be to get a Car Loan. The purpose of this article is to explain what it would eventually cost to get a car loan.

Car Loans are cheaper than Personal Loans

In a situation where you want to purchase a brand new or used vehicle, but your own bank statement wouldn't allow for an outright cash payment, you can apply for a Car Loan. In this article we would like to explain you what the Costs of a Car Loan are. In case you want to find out more about what a Car Loan is and what the difference towards a Personal Loan is, please click here.

Car Loans are usually cheaper than Personal Loans, because the borrowed amount at hand is secured by an asset, in this case the car or motorbike, whereas Personal Loans usually have no collateral, which is why Personal Loans are called "unsecured Loans". So in case you, as a Loan taker, are unable to pay back your debt or interests, the Loan issuer (usually a bank) has some security in its hands: the car. This is why interest rates for Car Loans are usually significantly lower than the ones of Personal Loans.

But Car Loans also work differently than Personal Loans. The most important characteristic of a Car Loan is the fact that you, as a loan taker, do not own the vehicle until the end of the lending period. Only at the end of the tenure, after you have repaid all interests and principal amounts, the ownership of vehicle is transferred to you. This practice may sound unfair, but it is common practice around the world.

Car Loans are issued by Traditional banks or Loan Institutes, which offer different products in terms of tenure, equity contribution, required insurance, fees, and Loan volumes. Comparing offers is crucial here, as you can save a lot of money, because Car Loan products differ significantly from company to company.

What are the Costs of a Car Loan?

In order to make a qualified decision when it comes to Car Loans, you need to understand the five most important variables: Loan amount, APR ("Annual Percentage Rate", also called interest rate), Loan tenor (Loan duration), equity contribution (usually a percentage that you need to pay cash in the beginning of the contract) as well as "other" fees (e.g. management fee, processing fee, legal fees or others). When these variables are understood, the next step would be to compare these key factors by different Car Loan providers in order to make the optimal buying decision for you.

Example: ₦4,500,000 KIA Cerrato

We will explain the importance of those variables with an example. Lets assume the following scenario: You would like to finance the purchase of a 2015 Kia Cerrato which may cost you ₦4,500,000. For this car, the best offer you can get is a 25% equity contribution (₦1,125,000), while the remaining amount is paid with a Car Loan (₦3,375,000). Tenure is expected to be 36 months, while the interest rate (APR) is assumed to be 24%.

At the beginning, the Loan Provider charges you with a total of 3.8% of other costs, which are made up of a) legal fee (1.5%), b) processing fee (1.5%) and c) stamp duty (0.8%). Additionally, there is a 1% yearly management fee, as well as a 2% purchase option, which you definitely need to take, because you would like to own the car in your name at the end of the Loan tenure. Besides that 5.0% of Car value are charged for comprehensive insurance cover on a yearly basis. So how much do you have to pay now on a monthly basis?

The initial payment of fees is made up of the equity contribution, the management fee, the comprehensive car insurance, the purchasing option, as well as the other fees. In other words, your initial investment for the vehicle would be: ₦1,125,000 (equity contribution) + ₦225,000 (comprehensive insurance) + ₦90,000 (purchasing option) + ₦135,000 (other fees) = ₦1,575,000. The subsequent monthly payments are made up of the interest payment and the Loan repayment (sometimes called Principal), which amount to ₦67,500 (interest) + ₦93,750 (principal) = ₦161,250.

It is important that you plan the expenses in advance so that you ensure your personal financial stability in order to continue paying interest as well as principal payments. Keep in mind that the costs illustrated in the above example seem to be high, but keep in mind that you own the vehicle at the end of the Loan tenure.

Conclusion: Compare the market and find best option for you

With this in mind, you can easily work out your budget and payment schedule to avoid defaulting on the loan. You must also remember that the car stands as collateral for the loan and can be repossessed by the loan provider, if you default on payment. To get the best deals on car loans, it is best advised that you compare rates from different providers on a platform like TopCheck.com.ng. TopCheck compares the market on your behalf and simplifies the decision making process.

Example Car Loan: ₦500,000 Loan amount, 1-36 months duration, 1.92% monthly interest rate, 33.55% max APR, ₦1,003,250 total value, ₦51,250 max monthly repayment, Rosabon Car Loan

Can you afford a Car Loan?