Ugo: Getting a car loan in Nigeria is not that difficult provided you are qualified for it. The following steps may just give you a shot at getting the loan
Mike: Hold on. Qualified? How is one qualified?
Ugo: Nigerian banks are very much inclined to extend car loans to individuals who have a regular income stream. A regular income stream basically means you have a regular source of revenue such as salary or income from a trade. Salary earners with companies that are well-known have a better chance of securing a car loan. Individuals who are self-employed can also get a car loan provided they can prove that their business generates a regular pattern of inflow. The easiest way to demonstrate that is to show them your bank statement for a period of at least two years.
Mike: Now I get it. So if I was working for one ‘Baba A Supplies’ I might not get a loan?
Ugo: The chances of getting the loan will indeed be very small. However, it does not rule you out completely, it only makes it more difficult. You will have to prove to them that the company is a viable company and that they are able to pay you continuous salary for the period of the loan.
Mike: Okay, so how can I get the loan?
Ugo: These are the steps. They mostly apply to salary earners, and may be slightly different for self-employed individuals.
Step 1: Identify the kind of car you wish to buy. Be it a tokunbo car or a brand new car, the banks are always willing to finance. This is a very important step as you do not want to approach a bank without knowing what car you have in mind to buy. That way you have a guide even if you decide to change your mind on the type of car along the way.
Step 2: Find out the price of the car and when it will be delivered to you once you pay. That part is easy. All you need to do is to go to a car shop/dealer identify the car you wish for and get a proforma invoice. A proforma invoice is basically a draft invoice. It is none binding on you or on the seller of the car. Banks usually don’t finance the entire purchase price of your car. They usually fund 60% or at most 70% whilst you fund the balance with your own money (equity). So if the car cost N2m the bank will give you 60% of that which is N1.2m while you pay the balance N800K. You will also be expected to pay for insurance of the car which is about 5% of the value of the car. That is N100k in extra cost to you as well, so you have to take that into consideration when applying for a loan. Banks don’t accept 3rd party insurance.
Step 3: Find out if the car dealer already has an arrangement with your bank. Some of them also have prearranged partnerships with car dealers which also aid processing of the loan. For example you wish to purchase a car from Car Dealer and Company (CD Co) and have approached Bank X. Bank X and CD Co also have an arrangement where buyers of their cars can get loans. Then the process becomes easy for you. If they don’t still approach your bank with the invoice anyway.
Step 4: Banks offer several products that outline their terms for a car loan. However, the details are mostly the same. The difference probably lies in the speed at which your loan will be processed and their ability. So if you use a bank that offers a product relating to car loans, it might ease the process for you. If your bank doesn’t have any packages, then you can either proceed with them or try another bank. However, almost all banks offer such products.
Step 5: Assuming your bank does get in touch with your account officer and request that you need a car loan. If you want to use a separate bank then just identify the bank and approach their customer service desk for direction. But bear in mind that you will have to open an account with them and give them standing orders (which I will explain later).
Step 6: Now that you have met with the bank, you will be asked to draft a formal application letter for a car loan. The letters isn’t anything complicated and will typically look like this (Car Loan template). Once you are done with the letter attach a copy of your pay slip, the invoice for the car (now you must had got the final invoice) mentioned above and a copy of your employment letter. Give it to your account officer for processing.
Step 7: Now that you have submitted your application to the bank, all you now need to do is wait for it to be processed. The bank, through the account officer, will present you with a set of forms to fill which will include things like: your personal details, salary, address, bank address etc. They are mostly routine and should be easy to fill.
Step 8: Once that is done the bank will present you with an offer letter. The offer letter from the bank is a document showing the amount lent to you by the bank, the interest rate, repayment structure, fees, security etc. Lets take them one at a time
Loan Amount : Loan amount is the sum that the bank has finally agreed to lend to you. Remember it helps fund part of the purchase price of the car. Please note that the bank will not disburse the money to you if they do not have deposit of your own contribution (equity) in an account domiciled with the bank
Interest Rate : This is the rate the bank charge you on a monthly basis. The bank will mostly write it like this “interest rate is 20% and is subject to market conditions”. What this means is that the rate may go up or down depending on what the rates go for in the market. Most times it goes up. It is important to look closely at the interest rate as it forms a huge chunk of the money you pay the bank. So make sure you ask around to be sure your rates are competitive (as good as what is obtainable in other banks). The banks will also charge you fees. The fees are the Facility fee and Management Fee. The Facility Fees are mostly 1% flat and is a one-off fee. The Management fee is usually also 1% but is paid every year of the anniversary of the facility.
Repayment Term: Sincecar loans are mostly over a period of 4 years, repayment terms will simply state that you will “repay the loan monthly in arrears for 48 months”. They will also give you an option to pay off the amount if you wish to pay off the loan before the end of the 4 year period. Always ask for a repayment schedule as it gives you an idea of the amount you will be paying every month. See sample repayment schedule Here as well. If your salary account is domiciled with the bank that loaned you the money, then repayment will be by a direct debit from your salary at the end of every month. If your salary account is domiciled elsewhere then you will give the bank post dated cheques for the duration of the loans. They may also require standing orders which are basically an order by you to your bank (where you have your salary account) to deduct from your salary every month pay the bank that gave you the car loan.
In both cases you should always check your bank statements at the end of the month to see how much was debited to your account as loan repayments. Check the amount debited to your bank (loan) account against your repayment schedule to be sure you haven’t been over charged. If the difference is more than 10% in any given month (i.e your repayment schedule says N80k for a given month then suddenly you see N88k for that month) you should quickly call your account officer for explanation.
Step 9: Once you accept the offer and fulfill all requirements of the bank the loan will be disbursed to your account. But mind you the bank will only disburse the amount to you once when they are about to issue a bank draft to the car dealer for the purchase of the car.
Step 10: The bank will issue a draft to the car money after which the car will be released to you. The bank will hold a spare key for the car. The ownership of the car will be shared between you and the bank. Therefore your name and the banks name will reflect in all the car documents. The car is now yours and you can now drive it home!
Note that banks do not usually ask for a collateral. Their security is basically the comprehensive insurance which you pay for and the car itself. So when you default in payments, the bank can seize the car from you and sell it recover their money.
Note: This is just a guide and does not guarantee that you will get the loan, even if you follow the steps above.