The answer to this is a simple NO except if it is for a company and will be used for its operations!!!
If you do not have the money to buy a car then there is simply no need taking up a loan to buy one. You pay interest rates that the tax man hardly recognises. You are constantly under pressure to repay the loans every month from the bank who also more often than not increase your interest rates periodically. You also face the opportunity cost of loosing any possible return on investment for paid instalments that otherwise would have been invested in a fund. Also, cars wear and tear and never ever appreciate in value except its the person buying it off you is completely oblivious. I have bought a car with a car loan before and didn’t find the experience funny!! Let me give you a real life example.
Back in 2007, I decided I was going to get a brand new car for my wife. The car we liked cost just under N4million even though I had about N1.5million cash. We decided to take out a loan of about N2.6million to finance the purchase of the car. The decision that was made far more easier because my wife had a vehicle allowance that matched the monthly instalment repayment the bank was offering. Meaning at the end of the day, the company basically repaid the bank as the car allowance was not her salary but a monetization of a vehicle. How silly??
By the time we were done repaying the bank, we had effectively paid almost double the cost of the car. Interest rate had also risen from 17% to about 22% and so we had to make up for the difference from our income. Somehow we also failed to realise the N70k allowance she had included cost of maintaining the car as well as fuelling. So, in addition to repaying the bank the instalments we ended up spending our income as well on fuel, insurance and vehicle maintenance. Imagine if we had invested that N70k every month for four years at 1% interest rate per annum. Today that investment will be worth about N4.3million!!! (THAT IS THE POWER OF COMPOUNDING INTEREST).
Here are common excuses people (including me) give for taking out a loan to buy a car
- It’s a brand new car and I need not spend much on maintaining the car. Ans: While, in some cases that may be true, not everyone is good at maintaining cars. And some cars for some unlucky reason develop faults barely two years after buying it brand new. So that is no excuse.
- My salary can take care of it…..Well, tell that to a guy who took out a loan to buy a brand new car only for him to loose his job six months later. And that is after he had used his savings as equity contribution for the car. Now he has to sell the car for less and still look for money to repay the bank. Double jeopardy!!
- Brand new cars have good second hand value so I can resell it and recover my money back: Well that is on the condition that the car will never get damaged or stolen or just outdated right? Wrong!! Some cars do have good second hand value but most don’t. Besides what is the point when you borrowed to buy the car. Second hand value or not, you have still incurred interest payments and may well sell the car for a value less than what you are owing the bank.
- The bank is giving me a good rate: Banks never give good rates because their interest rates are hardly fixed. What is the point telling you your loan is 17% only for them to increase it to 22% after three months. Bank interest rates are always subject to market conditions which somehow always drives rates higher.
There are loads of other excuses people give which is in no way justified, even if someone agrees to pay the instalments for you, like in my case. The only time you take a car loan to buy a car is if the car will be used strictly for business. That is because, the interest you pay to the bank will be deducted from your taxes which you don’t get if you buy the car in your name.