Only about two out of every 10 Kenyans (22%) have a car they can call their own. This is according to the Statista Global Consumer Survey conducted in Kenya in 2021.
Another 31% of the respondents who stated that they have a car permanently available in their household said the cars belonged to a family member with 5% indicating access to a company car.
The majority, 45% or just about half of the survey respondents, stated that they do not have access to cars in their homesteads - neither their relative’s nor a company’s car.
According to Trading Economics, the number of new vehicles registered per month averaged at 18,000 from 2006 to 2021, reaching an all-time high of 49,000 in June 2021.
New vehicle registrations in Kenya are forecast to increase to an average of about 29,500 in 2022 and 32,000 next year, according to Trading Economics' econometric models.
This data indicates a rise in vehicle ownership. Many people are going to buy vehicles for various reasons including income generation and the convenience of owning one.
However, as nice as owning a car can be, having one is traditionally considered a liability as it does not appreciate in value and costs to run - starting from fuel to keep you moving, to preventive and curative maintenance, to insurance costs every year.
Given the allure of car ownership, it is not surprising that some people may embark on purchasing one for the wrong reasons or without the right planning. There is no shortage of stories of people who have had their vehicles repossessed after defaulting on a car loan or others who have had to ground their cars after they turned out to be too expensive to run.
To enjoy the numerous benefits of owning a car that are all too well understood, you have to be sure that you are financially stable enough to buy and afford to own one.
It would be ideal if you decided to own one based on a good assessment of your finances. How then do you know you are financially fit enough to get a car?
One crucial thing you need to have is a steady instream of income. You need to be sure that you will be able to run the car and pay all your dues every month.
The guaranteed income has to be assured for at least the length of the car loan if you are going for financing.
People with multiple income streams or those with passive income streams may feel more confident of this guaranteed income as opposed to those on employment contracts.
It is generally recommended that you raise, at a minimum, 20% of the total cost of the vehicle as down payment even when a dealer or lender is offering 100% financing.
With this money, you are able to approach an auto loan institution to borrow the remaining 80% as it acts as proof that you can afford to get the car. This is among the many other eligibility requirements different lenders will ask for.
Note that to be truly sure you can afford the car, this down payment should not be drawn from your other targeted savings accounts such as towards home ownership, retirement or your children’s education funds.
Car ownership should not come in the way of your other financial goals especially when it is not part of your longer-term financial goals.
At the very least, you should be contributing to your retirement, building or have built an emergency fund, have health insurance and building a healthy investment fund if you already are not investing - or if the car is not an investment in itself (e.g. for taxi business or work obligation).
You want to know you can still be saving towards your targets as you repay your car loan. If an emergency happens, you can deal with it and still keep up with your car loan obligations.
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This is another great point because what is the point of having a car that you cannot use? One thing about a car is that it is a liability. It will cost you money to have it, and still, if you do not use it, it will still cost you money to maintain it in good condition.
Ensure you have enough money to use your car whenever you need it. It does not make sense to have a car but use a Boda boda in the middle of the night because using your car will be costly for you.
Life can happen and turn your financial life upside down. When it comes to financial emergencies, it is not about if, but when they will happen.
Medical emergencies that are not within the coverage of your insurance - can get costly. If you do not have medical insurance, it can be much worse. Family emergencies, loss of employment, dried up cash flow, unanticipated travel costs etc, the list of possible emergencies that need instant cash injection can be endless.
If you are going to take the motor vehicle financing route, you cannot afford to fall behind on your repayments.
Having an emergency fund that can cover living expenses of up to between 3 and 6 months or more is the best way of ensuring when an emergency happens, your car ownership is not in jeopardy.
Getting the right insurance too is an important priority.
One of the biggest, almost cliche examples given of people living beyond their means has to do with the purchase of cars for the wrong reasons such as keeping up with their peers, showing off or just because it is nice to have.
There is a simpl;e way of knowing if you are living above your means. And it stems from its definition.
Living beyond your means either spending more than you are making, spending exactly what you earn or spending almost all you make every month. We can give a rule of thumb of save at least 10% of what you make every month as the threshold past under which one is living above their means - but in reality, you have to strive to save at least 20% of your income every month.
So, when you think about all your financial goals and obligations - then factor in the monthly cost of running the car (fuel, insurance, maintenance, loan repayments etc), if you are not able to save at the very least 10% of your monthly income, you may not be financially ready to own a car.
The 20/4/10 rule is popular in the United States as a way of determining financial readiness to own a car - but can also be used to assess yourself here in Kenya.
Let's say you are interested in a car costing Ksh800,000. The first condition to satisfy is the payment of 20%. In this case, you need to have Ksh160,000.
If you don't have it, the rule recommends that you need to first save up to at least this amount before proceeding.
If you do, we move to condition 2 which is finding an auto loan lender and negotiating for a repayment period of four years which, according to the rule, is an optimal period just long enough to keep the cumulative interest low.
Do you check that condition? If yes, then move to the last one. You have to make sure the total costs of owning the car does not exceed 10% of your net income. This includes insurance, the monthly loan repayments, fuel and maintenance.
If you live along Thika Road and work at Nairobi CBD for example, your average daily fare is Ksh200 maxing at Ksh6,000 if you were to work all days of the week for a month. Driving for the same number of days is typically going to be more expensive.
If you consider a conservative estimate of one full tank of 50 litres per month at Ksh160 per litre, your monthly fuel costs add up to Ksh8,000. If say, you get free parking and have paid just a third-party cover that can be as low as Ksh5,000 per year (Ksh420 per month), then all you need to do is add the monthly repayments and multiply by 10 to get what your monthly income should be.
If you pay city council parking at Ksh200 per day, then your monthly parking costs maxes at Ksh4,000 if you work 20 days per month.
If your comprehensive insurance is a conservative Ksh30,000 per year, your monthly insurance cost is Ksh2,500.
Remember that the running costs should cover parking, fuel, auto-checkup and toll gate fees if you are using the Expressway often.
Note that this rule can be hard to apply for low-income earners with the workaround being the need to raise a downpayment that is higher than 20%.
A car can be a great acquisition whether it is to meet your cherished lifestyle goals, to use for business purposes or as a necessity to improve your travel needs, save time and increase your earning potential.
Given the relatively high cost of acquiring a car, it is important that one does an assessment of their financial readiness to make sure their long term financial goals do not suffer in the process.
The 20/4/10 rule can be a good starting point but it doesn't have to be the only way you assess your readiness.
At the end of the day, make sure you are making a decision that will enhance your overall financial position and not hurt your prospects of achieving your most important goals.