Determining the right loan repayment period

As soon as the car or a commercial vehicle leaves the showroom, it begins to depreciate quickly. Hence, at the beginning of a loan, the buyer is typically "upside down," or "under water". This means the buyer owes more than the car or vehicle is worth.

When it comes to buying a car or a commercial vehicle for business, most people do not have an idea of what monthly payments will fit their budget, and what they target when making a deal. However, majority of the buyers lose track of the bigger picture; the total cost of the car or commercial vehicle, including insurance and the length of time it will take to clear the loan. For the past decade, the average car loan term has slowly crept past three years, and is now close to five or mostly six years. Majority of buyers tend to opt for long term loans. The benefit for such a move is the lower repayments one will be making each month. It is important to consider the following reasons before opting for long-term asset finance loan agreements:

Higher interest costs

The longer you finance a car or commercial vehicle, the more interest you will have to pay on it and an additional year or two in comprehensive motor insurance. If your cash flow is healthy, it is better to choose a three-year loan than going for the long term five or six-year loans. For start-ups and mainly micro businesses, it is advisable to opt for the five or six-year loans or asset financing agreements, to ease the repayment pressure and assure the business of a healthy and stable working capital. The monthly payment for a five-year loan is normally lower than that for the three-year loan term.

The modern trend that supports specialization involves individual motor companies entering into asset finance agreements with a number of banks that fits well with their sales strategies. The banks then link up with their subsidiaries or partner insurance companies to offer packages that include the compulsory comprehensive motor insurance. For instance, the Family Bank of Kenya has the much-acclaimed Family Bank partnership with Isuzu East Africa in a deal that ensures its customers receive up to 95 per cent financing to purchase vehicles, in a financing product dubbed Changamsha Biashara. This unique deal incorporates innovative features which include:

•           Customers enjoy up to 90 days repayment holiday, that is, before they start to remit the monthly repayments.

•           Customers can access an additional biashara boost credit facility of up to Ksh 200,000, to stimulate the business, hence the Swahili term changamsha.

•           Flexible repayment period of up to 5 years (60 months) to suit the individual customer needs and cash flow management

•           Customers get two free memberships for Maisha Air Ambulance Cover from AMREF Flying Doctors, a very important service to ensure peace of mind for the driver and his loader.

This partnership is already enabling Micro, Small and Medium-Sized (MSMEs) customers in the agribusiness, trade and logistics businesses to conveniently purchase the indomitable Isuzu Truck, Bus and Pickup work horses at affordable yet competitive interest rates, a financial package that is already enabling Isuzu vehicles to commence the path towards new sales recoveries, after the initial onslaught by the Covid-19 pandemic effects.

In particular, business owners in the transport, logistics, agribusiness, education and religious institutions are accessing 95 per cent financing for credit worth customers. Additionally, customers who run their own businesses or are in the transport business are now enabled to take advantage of competitive insurance rates through Family Bank of Kenya’s insurance partner, Kenya Orient Insurance, which is incorporated within the asset finance facility as one single total cost. The insurance package includes accidental damage excess protector, political violence, terrorism cover and the theft of the alternator and starter for the school buses.

As a bank that values MSMEs, Family Bank aims to bridge the gap hindering their growth and this partnership is a big step in that direction. With this partnership, we will not only offer entrepreneurs financing for Isuzu Vehicles products but will also extend to them favourable terms and quick approvals that will ensure their businesses keep growing,” stated CEO Rebecca Mbithi during launch.

Customers are already accessing this asset financing deal across Family Bank’s 91-branch network and can collect their desired vehicle from any Isuzu East Africa distributor and dealers throughout Kenya.

Family Bank equally has a similar although slightly different asset financing arrangement with Simba Corporation, facilitating the purchase of Mitsubishi and Mahindra trucks and light commercial vehicles.

Just recently, Coop Bank and Toyota Kenya entered into a similar agreement, albeit with differing terms.

Negative equity and insurance payment

As soon as the car or a commercial vehicle leaves the showroom, it begins to depreciate quickly. Hence, at the beginning of a loan, the buyer is typically “upside down,” or “under water”. This means the buyer owes more than the car or vehicle is worth. The situation worsens if the buyer has not made a large enough down payment. The time it takes you to get “above water” and build equity in the car or commercial vehicle will vary, based on the make you bought and amount of the down payment made. However, one thing does not vary; the longer your loan, the longer it will take you to build equity.

When you have no equity in the car or commercial vehicle, you cannot sell it if you need some working capital or some money in an emergency. It also gives you fewer options if you get tired of the car or vehicle. A buyer will only pay you what the car or vehicle is worth, not what you owe on it. You are stuck with the balance of the loan. Similarly, if you get into an accident and the car or vehicle is declared a constructive total loss, the insurance company will only pay you what the car or vehicle is worth at the time of the accident, also known in insurance language as the pre-accident value.

The alternative would be to insure the car at an agreed value, at a slightly higher premium payment. The remainder of what you owe will have to come out of your pocket.

Limits Trade In

Our love for the car or vehicle we have brought is at its highest level when it is brand-new. The romance quickly fades when we notice something better. Our anxiety rises when we want to trade in the car or commercial vehicle for something new. If you have a five-year loan and get the itch to buy a new car or commercial vehicle around the four-year mark, you will have to wait another year to trade in. The other alternative is to roll the balance of the loan into your next purchase. However, note that this is an extremely bad idea, as it adds up to an even longer loan commitment and higher monthly payments.

Low resale values

            Resale value is another reason to avoid extra-long loans. For instance, a three-year-old car is more desirable and more valuable in the used-car marketplace than a five-year-old one. A dealership will likely give you more money for the three-year-old car. At that age, it is a great candidate for the certified-pre-owned process, which means the dealer will have a more valuable car to sell. On the other hand, a five-year-old car has too many kilometres on the dial and one will earn less deduction for a trade-in compared to a newer car.


If you have to buy a new car or commercial vehicle but the monthly payments that are being quoted for the usual three-year loan are too high for you, you’re shopping outside of your price range. You should consider a five- or six-year loan or consider buying a used unit then. There are very good cars and commercial vehicles in the mushrooming roadside car dealers that you are spoiled for choice.

Interest rates are a bit higher for used cars and commercial vehicles for obvious reasons, but since these units cost less, there is less to finance and the payments will be correspondingly lower. Lastly, take a look at all the numbers in the sales contract before you make that crucial and final decision in taking up an asset finance or loan.  You can always contact an expert for guidance and take your time. Also, shop around banks and vehicle dealers for the best bargains.


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Dr. Hanningtone Gaya

Dr. Hanningtone Gaya

Kenya’s Dr Hanningtone Gaya, holds a PhD in Commerce in Business Management from Nelson Mandela University (NMU), is viewed as an authority in country branding and is the founder chairman of the Brand Kenya Board.

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