Experts say the convenience of owning a car should never outweigh the burden of repaying an unsustainable loan. PHOTO/FILE
When Robert Kaggwa bought his first car, a used Toyota Premio, he financed it through a microfinance institution that promised quick approval with little paperwork. It seemed like a dream come true.
But just months into the loan, he began to fall behind on repayments due to hidden charges and high interest rates. His car was eventually repossessed, and he had already paid more than half of its value. Kaggwa’s story is not unique.
Across Uganda, many people who dream of car ownership are turning to loans, Saccos, and instalment plans to make it happen. The idea of driving to work or running a business without relying on public transport is appealing.
However, what starts as convenience can quickly turn into a financial nightmare for buyers who rush into deals without fully understanding the cost. Car financing is becoming more common as vehicle prices continue to rise and fewer Ugandans can afford to pay in cash upfront.
Annually, Uganda imports thousands of cars, most being used imports from countries such as Japan and the United Arab Emirates. Whether for private use or business purposes, the demand is there. But the process of financing a car can be complicated and full of traps, especially when it involves high-interest lenders or informal agreements.
Bank loans
For salaried workers, commercial banks have become a safe option. These banks offer auto loans to customers who meet certain requirements, such as proof of employment, a consistent income, and sometimes a down payment. Interest rates for bank car loans typically range from 18 to 24 percent per year, and repayment periods can stretch up to five years.
The biggest advantage is the structured and regulated nature of these loans. Borrowers are taken through a formal process, with clear terms and legal documentation. Sarah Nansubuga, a telecom employee in Kampala, took this route when she wanted to buy a Toyota Passo.
“I took a car loan and it was straightforward. They financed 80 percent of the car and deducted from my salary monthly. I paid off the loan in two years,” she says. For Nansubuga, going through a bank meant peace of mind, knowing the car was insured and she would not face sudden penalties.
Saccos
Not everyone qualifies for bank loans. Those without formal jobs or consistent bank statements often turn to Savings and Credit Cooperative Organisations (Saccos), which offer loans to members based on their savings history and participation in the group. Saccos are especially popular in rural and semi-urban areas, where community-based finance remains a trusted model. The interest rates are generally lower, between 10 and 20 percent, and some Saccos accept guarantors in place of logbooks. Francis Muwonge, a teacher from Masaka, bought a Toyota Probox to transport produce from his village to nearby markets. He did this through his Sacco. “They gave me a loan to buy a small Probox that I now use to carry produce. The interest is low, and they understand when times are hard,” he says. Saccos are supportive, though the downside is that they often cannot finance larger or more expensive vehicles due to limited funds.
Cost of microfinance loans
On the opposite end of the spectrum are microfinance institutions and informal lenders that promise fast approval and minimal paperwork. These institutions have found a market among small business owners, boda riders, and informal traders who need vehicles to generate income. However, these loans come with a heavy cost. Interest rates can go as high as 60 percent annually, and many clients sign agreements without understanding how repayments will work. Lydia Namubiru, a salon owner in Kampala, borrowed from a microfinance firm to top up for a Toyota Vitz. “I missed one payment, and they came for the car without notice. I felt cheated,” she says. Namubiru’s experience is a common one. Many borrowers do not know whether they are being charged interest on a flat rate or reducing balance, terms that can make a big difference in how much they repay. In some cases, clients also face hidden fees, including insurance premiums and early repayment penalties.
Buying on instalments from car dealers
Another growing trend is buying cars on instalment directly from car dealers. In these informal arrangements, a buyer agrees to pay a portion of the car price upfront and settle the balance over time, typically in six to 12 months. Dealers keep the logbook until the final payment is made, which gives them leverage if the buyer defaults. While convenient, these deals are rarely backed by written contracts or legal enforcement. Geoffrey Kirunda, a stage manager in Kampala, opted for this model.
“The dealer let me pay in six instalments. But when I delayed one payment, he threatened to take the car. I had no agreement to protect me,” he says. The lack of consumer protection in such arrangements means the buyer must fully trust the seller, which can be risky. That said, some buyers manage to complete their payments without incident and end up owning a car with less red tape, provided they are disciplined and communicate well with the dealer.
Balloon payment trap
An even trickier method now gaining traction is balloon payment financing. This setup allows buyers to pay small monthly instalments, but leaves a large lump sum, often 30 to 50 percent of the car’s value, due at the end of the loan period. For many, the final “balloon” payment proves unmanageable, leading them to either refinance or surrender the car. It is a setup that looks manageable in the short term but often causes financial stress in the long run.
Paul Musoke, a Kampala-based financial advisor, warns that car buyers are too often swayed by monthly payment figures without considering the total cost of the loan. “Many people see the car as a lifestyle upgrade instead of a financial commitment. Without a sustainable income, the car becomes a burden. Always ask yourself, can I afford this comfortably for the next two years, even if my income drops?” he advises.
Red flags to watch for
There are several red flags to watch out for when exploring car financing options. Musoke points out deals without written agreements, flat interest rate loans disguised as reducing rates, penalties for late repayment, and unclear ownership of the logbook as signs of a potentially dangerous deal.
“Some car sellers even inflate vehicle prices when bundled with financing, making the buyer pay far more than the car’s market value,” he reveals.
Musoke advises that car instalments should not take more than 20 percent of a buyer’s monthly income and that buyers should prepare for additional costs such as insurance, fuel, maintenance, and taxes.
Borrow wisely
While car financing can be an excellent way to achieve mobility and independence, it is also a long-term commitment. Musoke notes that the convenience of owning a car should never outweigh the burden of repaying an unsustainable loan.
“Comparing different lenders, reading through contracts carefully, and seeking guidance from a trusted advisor are all steps that can help buyers make informed decisions,” Musoke says.
Smart moves when financing a car
•Compare lenders: Always get at least three loan offers before deciding.
•Ask about interest type: Know if it is flat rate or reducing balance; they are not the same.
•Insist on full documentation, even if buying from a friend or small dealer.
•Factor in extra costs: Budget for fuel, insurance, repairs, and taxes.
•Use the 20/4/10 rule:
- 20 percent down payment.
- Loan term not longer than four years
- Monthly cost should not exceed 10 percent of your gross income.
