How to buy a car without taking a loan A lot of people buy cars on loan; few people can walk into a showroom and pay cash for a car. However, like any other financial goal, if you start saving early, even before you start thinking of buying a car, then you can make it to buy a car without taking a loan. As with any other savings goal, the trick is to anticipate the things you want to buy in future and start saving for them early enough, even before you need them. The problem for most people is that they will work for five to six years, then wake up one morning and decide, “I have worked for long enough and I am now earning slightly more money, so now I need a car to prove that I have made it.” (Or for whatever reason). When such a person checks his or her finances, s/he finds that s/he cannot afford to pay cash for a car, but s/he can afford to pay the monthly repayments for a car loan. BUYING A CAR USING A CAR LOAN So say you wanted to buy a car worth Sh600, 000 and you want a loan. First of all, most banks don’t offer full financing; they will give you something like 90% i.e. Sh540, 000, then you raise the Sh60, 000. In the old regime, before the Banking Act was amended to put a cap on interest rates, you would get a car loan for say 18% payable in between 48 to 60 months (4 to 5 years). If you take the Sh540, 000 at 18% for 60 months (5 years), you’d be required to pay about Sh13, 712.46 to the bank every month (I haven’t included other fees such as loan insurance, etc, associated with loans). Affordable, right? Let’s see. At the end of the 60 months, you will have paid back Sh822, 747.60 for a car worth Sh600, 000 and by the time you have finished paying your loan, the car will be worth less. Cars may lose between 10 to 40 per cent of their value every year depending on mileage, model replacement cycle, how well they are maintained, fuel efficiency, etc. So your Sh600, 000 car today (which you will pay Sh822, 747.60 for) might fetch as little as Sh300, 000 in five years depending on a variety of factors. What if you took a Sh540, 000 car loan at 18% for 48 months (4 years)? You’d be required to pay about Sh15, 862.50 per month. At the end of the four years, you will have paid back Sh761, 400 for a car worth Sh600, 000. Though the good thing is that by paying it faster, you pay much less. The tables below show you how much you would pay for a car worth Sh600, 000 having taken a loan of Sh540, 000 (90% financing) at the old rates (about 18%), and the next table shows how much you’d pay for the car loan under the new more favourable rate of 14.5%. Note that the faster you pay your loan, the less interest you pay. So for instance, a person who took a Sh540, 000 at 18% and paid in 60 months will end up paying Sh882, 747.60 for the car, while a person who took the same loan and paid within 12 months will have paid Sh654, 086.40. A difference of Sh228, 661.20, meaning that the person who takes five years to repay the loan will pay Sh228, 661.20 more than another person who took the same loan at the same rate, but repaid within 12 months. HOW TO BUY A CAR CASH How about if you want to pay cash for that Mazda Demio worth Sh600, 000? Perhaps you are 23 to 25 years old, just graduated from college and started on your first job or business, still living at home with minimal expenses. Perhaps you earn Sh40, 000 net after paying tax and the mandatory deductions (NHIF, NSSF, HELB Loan, Sacco, retirement fund, welfare, medical insurance, etc). You spend Sh4, 000 on tithe (could be more depending on your gross salary), Sh3000 on fare, Sh3000 on lunch, Sh1000 Airtel Unliminet bundle (calls/SMS/data), Sh2, 000 on personal effects and contribute Sh5, 000 to help your parents buy food or utilities. That’s Sh18, 000. You are left with Sh22, 000, which you can channel to different savings goals. Say one of your goals is to buy a car by the time you get to 30, and you decide that out of the Sh22, 000 you are directing to savings, you will dedicate Sh10, 000 per month to a money market fund earning an average of 11% per year. In five years, you will have Sh791, 155.02. Even if the car you wanted is now worth 800, 000, you’ll probably be able to add the extra Sh8, 844.98 and buy your car cash comfortably. Remember within those five years, if you are really good at what you do and you get enough opportunities, your earning power might have increased such that even though by then you have moved out of your parent’s house and are taking care of all your bills, you will be able to save much more than the Sh10, 000 per month. Also, sometimes the fluctuating interest rates could go as high as 18% depending on the performance of the markets, meaning that you could get to your goal faster. Remember even as you channel the Sh10, 000 to the money market fund opened specifically for the car savings goal, you still have Sh12, 000 to channel to other goals. For example, maybe you are giving yourself two to three years to move out of your parents’ house, so you open another money market fund in which you channel Sh5, 000 each month and by the third year you have Sh212, 283.53 to pay deposit, reasonable rent and buy a few essential household goods to start with. And then the extra Sh7, 000 could go to other goals like Sacco shares and savings, etc. This is a case of planning ahead when you still don’t have much responsibility, so you maximise that advantage by anticipating future goals and starting to save for them early. A 25-year-old who is lucky enough to have Sh22, 000 to save every month and decides to save Sh10, 000 every month for a car he/she will buy on his/her 30th birthday, will be in a totally different place from his/her age-mate who spends all his/her extra Sh22, 000 on clothes, booze, entertainment and other things and then at 30 decides he/she needs a car. The one who started saving at 25 will be able to buy his/her car cash, while the one who never saved but realised they need a car at 30, will have to rely on a car loan and pay about 50% more for his/her car than the one who started saving early. If you are blessed to have a relatively good job with little financial responsibility, take advantage of this time when you have no financial obligations to plan for your future i.e. start working on your mid- to long-term goals today. You will thank yourself later for it. Even if you have responsibility, make saving a habit from early on. Every time you get money, even if it is not a regular income, cut 10% to 30% of it and put it in savings and then spend the rest after saving. A person who saves Sh1000 a month, is better off than one who saves nothing at all. And the good thing about saving beforehand is that even though you do decide to take a loan to help you buy a car, you will take only a small percentage (as you’ll have saved the larger percentage of the cost of the car), and so you will be able to pay off the “small” loan faster and thus pay less interest. And now to end, here’s a table showing how much you would save if you contributed the loan repayment amounts to a money market fund, so that instead of using them to pay loans, you are accumulating that money to buy a car cash in five years.