Buying a car on loan is no doubt tempting. While you can purchase a brand new car with little or no money, doing this often brings many problems down the line, the kind you should consider carefully before signing on the dotted line, writes Joan Salmon.
These days, one does not have to have 100 per cent of the funds needed to acquire their dream car. Taking a car loan, or call it car financing has helped several individuals and organisations to own cars they would have never owned were it not for these loans.
According to Ronald Ssonko, the asset Finance manager at dfcu bank, asset financing is a medium-term option for acquiring equipment, business vehicles, plant and machinery. A contract is drawn between the financing bank and the customer, whereby the financing organisation provides an asset of the customer’s choice for usage over a specified period in return for specified repayments at an agreed interest rate. At the end of the period and after complying with all the contract terms, ownership of the asset is fully assigned to the customer. Looking at vehicles as the asset in question, asset finance is based on the notion that business cash flows are generated from use of the asset.
With benefits such as no collateral because the financing product is the primary asset and that car financing allows one with limited capital and credit history to boost their operations provided their cash flows are sufficient to cover the asset finance facility payments, one would expect Ugandans to embrace this service without holding back. However, that has not been the trend which makes us wonder, why is that so?
Since the inception of the product in 2000, Ssonko postulates that there has been an excellent uptake of this product. He hinges this growth on sensitisation that has drawn in several beneficiaries.
However, Hamuza Ssengendo of cheki.co.ug, who totally agrees that car financing is a good plan for those clients who cannot pay cash, says there is still a great challenge of educating Ugandans about the service. He points out that cheki.co.ug and other players in the market offer financing services but sadly, most Ugandans take long to embrace changes even when car financing has been trending for a while now.
Talking about the repayment structure, Ssonko says car finance repayments are structured to match the client’s business cash flow pattern. Dominic Bukenya, a car fanatic, points to that factor, saying: “Financing is also dependant on the cost of the car, and duration of loan servicing. Take a scenario of someone who earns Shs1m yet they want to acquire a Shs20m car with repayment period of two years.” Bukenya states bluntly that this transaction will not work at all.
He also points out that many that go for this service would like to pay less for their monthly charge so as to have more disposable income. However, when the repayment period is stretched out, the pinch is felt for quite a long while. Many end up letting go.
If someone desires to pay up faster, looking at the interest rates that are not usually friendly thus opt for a shorter repayment time, they usually fail to meet the terms thus losing out.
The bitter bit about this losing out is that not only does one lose the money they have paid thus far, but also the car for which they got the loan.
Ssonko says this facility conserves cash and working capital as cash is not tied up in moveable assets and will be available to finance other business operations. However, Ken Ssekitto, a motorist believes that as long as he keeps paying for a car, and every end month presents gloom for him, his peace of mind is not guaranteed and he equates this to money tied up somewhere.
Speaking on persons that are eligible for the service, Ssonko mentions that one does not have to be a dfcu bank customer to qualify for an asset finance facility. However, you will be required to open an account with dfcu Bank on approval of the facility. While Kevin Atuhaise, a motorist, agrees to that fact that one cannot get a loan from a bank where you do not have an account but a challenge comes when you have got a better deal from a bank where your salary is not channelled. He foresees a challenge in payment.
Just like any other loan service, there are many that have failed to meet repayments for the financed asset. Ssonko answers that, saying: “If for some reason the customer fails to meet their obligation, we advise that they consult their designated relationship manager for a mutually agreeable solution to be worked out.”
He adds that a restructure of the facility can even be considered if significant changes in the business environment have altered the customer’s cash flow cycle.
However, Musa Muzeyi, a freelance photojournalist, says in his case, it is not about altered but uncertain cash flow. “My monthly pay is dependent on how much of my work is used. So in the event that I earn less in a certain month than what the bank needs from me, they will look at that as defaulting,” he points out. That will result in losing the car as well as previous payments. Muzeyi is one of many potential car owners that opt go to the bonds and sign a gentleman’s agreement regarding pay because they believe that bonds are more understanding than banks.
The biggest beneficiaries of the service, according to Ssonko are those buying brand new vehicles and equipment vendors naturally because their products tend to be slightly pricy. That means that their counterparts selling used are left out yet these draw in many cars.
While the burden of some customers has been eased, the banks still have yet another huge population to sensitise and draw in .
Challenges to banks
Looking at the challenges that banks have faced thus far, Ronald Ssonko, the asset Finance manager at dfcu bank, says just like any business, the challenges are coming at us every day and we are in solution-mode every day, but the two worth our mention today are;
• The cost of doing business in Uganda as exemplified by the cost of fuel has negatively impacted this product uptake. Many transporters have held back on purchasing new assets just, so they can manage the ever-increasing costs of doing business.
• High cost of funds for the commercial banks consequently implies a high cost of credit for the final borrower. This scenario has dissuaded many would-be borrowers away from the banks, subsequently resulting in a shortfall on the sales projections for this product.
Despite all the challenges pointed out there, Ssonko believes that Asset Finance is an alternative and viable option for Corporates, SME’s and individuals who want to acquire assets.
Alternatives to auto financing
Auto financing is meant to ease one’s acquisition of a car. However, many have talked about the several challenges they face with this service. Here are other options you may want to consider:
Buy within your means
Phillip Wabomba, a car enthusiast, says purchasing a car whose cost is within your present finances is the best thing to do. “There is no reason as to why one should go for a Mercedes when they can easily afford a Spacio,” he points out. Wabomba believes that while many Ugandans want to fit in with the crowd, there is no point to that if it will leave you in debt, not to mention losing the car and previous payments.
Talk to a dealer
Annette Murungi, a car owner, shares that she got her car through an agreement between her and a car dealer. “I paid half the cost and the rest was paid in installments for the next six months,” she adds. Murungi intimates that such as agreement is way better than going for an asset finance loan because the car dealer does not add interest to the car’s cost. Besides that, many are humane, it is so hard to lose your car unless one is a chronic defaulter.
Peter Ntambi, a car dealer, says if you do not have enough money with you, it is best to hold on and save. “There is no need to rush buying a car, only to get yourself into debt that will accumulate discomforting debt, overtime,” he advises. While such advice does not usually come from a car dealer, Ntambi postulates that there is no need to put yourself under unnecessary pressure over loans. He advises that while saving may delay you in getting the car, it presents fewer hustles.