Vehicle financing refers to the different financial options which allow a person own a motor vehicle without making a full payment up-front. With vehicle financing, an arrangement is made between the financer and the buyer, where an initial down payment is made, and then the agreed value of the vehicle is paid over a period of time at a finance cost. Vehicle financing is available to a private individual or to a business.
There are two main vehicle financing options: they are Direct Lending and Dealership Financing.
As the name implies, Direct Lending is the process where a loan to finance the vehicle purchase is obtained directly from a financial institution, such as a retail bank or a finance company.
Dealership Financing, on the other hand, involves the buyer entering a contract with a vehicle dealer to pay the value of the vehicle plus an agreed finance charge over a given period of time.
The deciding factor when considering financing options is the price of the vehicle. Shop around at banks and motor dealers before you make a decision about outright purchase, financing, or leasing your chosen vehicle.
If you choose a finance or lease option, it’s important to understand that the total amount paid for the vehicle depends on a number of factors, including the negotiated price for the vehicle, the Annual Percentage Rate (APR), the length of the credit charge this is usually 36 to 48 months. Bear in mind that only the vehicle price, the APR can be negotiated.
Before going into any vehicle financing, make sure that after the monthly payment for the vehicle, you have enough money left to cater for your living expenses. If for any reason you default on the monthly payment after contracting it, the vehicle may be repossessed from you by the dealer or bank without notice or court judgment.
Most vehicle finance options require an initial down payment, usually 20 to 30% of the total cost, depending on the financial institution or dealer. Higher equity contribution reduces the amount you need to finance as well as the financing cost.
All in all, purchasing a vehicle should be simple and fun, so don’t stress or rush into anything. Take your time and explore your options to ensure you are making the best possible decision.
This has been courtesy Diamond Bank as part of The Bankers Committee Financial Literacy Public Enlightenment Programme brought to you by The Bankers Committee, comprising all the commercial Banks in Nigeria and the Central Bank of Nigeria, CBN.