Car Loan in Nigeria: How it works but the question is can you afford it?

Before you start fantasizing about your dream car after discovering that you are eligible for a car loan,take a moment to think about this: can you afford that car? Again, before you answer that question, keep in mind that the terms and conditions for getting a car loan in Nigeria are very stiff and the interest rate is quite high. Do you still think you can afford that dream car? Fortunately, some banks are willing to finance the purchase of a tokunbo car but like I said, the terms and conditions are not pocket friendly.

Experts believe that, you shouldn't spend more than 20% of your net income (monthly take-home) on a car loan payment. Most Nigerian banks won't give you the loan if the monthly payment is more than 40% of your net monthly income. The minimum and maximum loan amount that can be granted by the bank should also be considered.

Most Nigerian banks will not finance the purchase of a car that cost below N1m or above N10m. Since the price of the cheapest brand new car in Nigeria (Kia Picanto - Manual) is about N1.6m, I guess the minimum amount automatically becomes N1.6m except you're planning to buy a tokunbo car. The maximum payment tenor for a tokunbo car is 24months (most banks) unlike that of a brand new car which can be up to 60months (few banks). So buying a tokunbo car won't really solve your problem as far as monthly payment is concerned.

Bank charges and monetary requirements should also be considered while calculating the affordability of the car. Here's a list of the average monetary requirements for getting a car loan in Nigeria (monetary requirements slightly differ from bank to bank).

• Equity contribution: 30%
• Insurance: 5.5%
• Charges (Management fee, processing fee and others): 3%
• Interest rate: 27% per year

As an example, let's see if Mr. A who works for XYZ company with a net monthly income of N65,000 will be able to afford a brand new Kia Picanto (manual) worth N1.6m assuming he would pay back in four years.

Mr. A would need some cash at hand.

• Equity contribution (30%): N480,000
• Insurance (5.5%): N88,000
• Total: N568,000

That's right; Mr. A should have saved about N568,000 before he even considers getting a car loan. The actual loan amount Mr. A will collect from the bank to fund the purchase of the car is N1,120,000 (car price minus 30%). So Mr. A's monthly payments will be:

• Charges: N33,600 (3% of the actual loan amount)
• Interest: N700,000 (27% per year of the reducing balance of the actual loan amount)
• Sub Total: N733,600 (Yep; the bank will make a profit of N733,600 from this deal)
• Actual loan amount: N1,120,000
• Total: N1,853,600
• Monthly payments (48 months): About N39,000

From the calculation above, Mr A obviously cannot afford a brand new Kia Picanto as the monthly payment for the car is about 60% of his net monthly income; too bad.

From the calculation above, Mr A obviously cannot afford a brand new Kia Picanto as the monthly payment for the car is about 60% of his net monthly income; too bad.

Use this auto loan calculator to determine the price range of a car you can afford. Once that is settled, you can run to your bank and start the process of acquiring a car loan.