Not many people can afford to buy a car with cash so they need to explore other avenues to own a car. One of these avenues is going to a bank and applying for a loan called “Car Loan/Car Finance/Auto Loan”. Even though it is not a complicated process, it can be confusing to know if this is the right avenue for you to buy your car. It is highly advised that before going to a bank, you need to know how much you can afford and which car you would like to buy. As I stated in one of my previous articles, it is crucial to think long and hard before you take a loan from a bank. It is important to ask yourself hard questions; Will it help me to achieve my financial goal? Can I afford it? Is it convenient? If your answers to those questions are “yes” then you can proceed to explore your options.

In this article, I will share the steps you should take when you decide to finance your next car, and also what banks need to do to improve auto financing in Tanzania. There are three steps that you should take when you are trying to finance the purchase of your car;

1. Review Your Budget — The first step is to look at your financial status. You must review your monthly budget and cash flow to figure out if you usually have money left to cover any extra obligations after your necessary needs. In case there is no money left for additional obligations, look for areas where you can cut your costs to have more room in your monthly budget. Through this exercise, you will be able to gauge how much money is left for you (i.e. how much you can afford) for your next car.
2. Choose A Car You Want — After knowing how much you can afford for your next car; the second step is to find the car that you would like to buy. When you know exactly what kind of car you want, it makes you focus on what you need and not what you want. You should take your time on this step to find a car that suits your needs both personally and financially. Usually, there are a lot of sales and deals that are being offered by car dealers hence it is important to visit as many car dealerships as you can to explore the opportunities.
3. Shop For a Bank — Once you have found the car that meets your need, the next (and third) step is to look for the bank that can offer you the terms and conditions that fit your budget. This step can be done simultaneously with the previous step (i.e. the second step) of looking for your specific car. The reason is that many banks have certain requirements on the types and features of the cars that they can finance. Some of those requirements are the date of manufacture, how many miles/kilometres the car has and the size of the engine. The reason is advised to do this step simultaneous with the second step is because a bank will require specific information about your choice of car to give you an idea of how much you can qualify for an auto loan. Once all the required information is collected then submit your auto finance loan application to the bank. If your application is approved and agreed upon, the bank will communicate and prepare the finance agreement which will detail the terms of the loan including how much you will pay every month, for how long, and the interest rate you will be charged. An interest rate determines how much interest and monthly instalments you’ll pay on your car loan. You can usually choose between fixed rates and variable rates but almost all banks in Tanzania offer an interest rate based on market conditions (so a variable rate).

Further to the above steps, I have mentioned, there is no doubt that auto financing in Tanzania needs to improve. The public’s knowledge about auto financing is very low and the terms and conditions do not align with the market needs. The auto finance operating environment is changing faster than ever before. Banks need to redesign their auto financing product to play a bigger role in the card industry in the country. I will share what banks need to do to improve auto financing in Tanzania. The banks can do the following to improve auto financing in Tanzania:

1. Being Engaged in the Car-buying Journey of Customers — As technology advances, customers have grown accustomed to digital information in other industries such as Telecommunication Companies Therefore the banking industry shouldn’t be left behind and must be engaged in the customer’s journey digitally. The days of customers buying cars in the traditional way through car dealerships are winding down. Banks should start offering simple to use online car-buying processes to the customer. Banks can offer car selection, pricing, and credit approval processes online to ensure the journey of car financing is seamless with an in-person experience whenever needed.
2. Developing A quick and Easy Financing Process — Many customers get frustrated and drop out of the financing process when they encounter a complicated process that involves tiring paperwork, and a long turnaround time. Instead, customers want a quick and easy financing process that is intertwined with the buying process. Customers would prefer the process that can be entirely online; an application form that can be filled online, to get a pre-approved online, and funds disbursed to card dealers electronically to ensure the customer’s expectations are met.

I will conclude by stating that think very carefully before you decide to take a loan from a bank to buy a car. Do your homework to make sure that you can afford that loan without disturbing the affordability of your basic needs. In addition, banks need to restructure the auto financing product as the current structure is not aligned with the market and needs of consumers by transforming their business model through advanced technology to capture the consumer’s behaviour. The banks will need to deploy more capabilities that align with the market needs either in-house or in collaboration with Fintech (Financial Technology) companies. As we are heading toward a credit economy, it is crucial for banks to be creative and redesign the auto financing product to play a bigger role in the card industry in the country.

Written by Kelvin Mkwawa, MBA

Seasoned Banker

Email address: Kelvin.e.mkwawa@gmail.com