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The jargon… you want to import a used car from Japan. You visit the BEFORWARD site and see some very nice cars. Let’s say you are from Kenya. Now, the government has put forth very strict measures about the age of the car that you can import second-hand. The oldest it can be is seven years. Good thing too, since we do not want to make Kenya a dumping site for all old and worthless jalopies. So you go online to look for a second-hand car. You know what you want, a Nissan Wingroad, Honda Civic, Honda Airwave … you name it. You spot it. The color is cool; year of manufacture is ok, 2009. See, its 2016, therefore the oldest car you can import must be from 2009.
The price is out of this world. So cheap. So affordable. And you think you will sell a cow or two and bang! You have a car. Its only $948 – that is less than Kshs 100,000. You feel happy, but wait … is that all the cost that you will pay for this car? It depends on a few things as you will see here and it is all in the terms used.
CIF – this term is used on many imported goods, it is applied to international trade. It means cost, insurance and freight charges. If you are paying CIF, then it means that you are paying for the car in full, but only up to the point of delivery, for example, to the port of Mombasa. The seller of the car has responsibility of the car when it is in transit, pays insurance for it as well as the freight charges from the port of departure to port of entry. When the car arrives at your port of entry, you will take over the unloading charges.
FOB – In this instance, your car will be considered free on board because you assume responsibility for the same when it crosses the rails of the ship. That means if you are importing a car from Japan, the seller is deemed to have released the car to you once the car got to the port of departure. You can therefore see that the difference between the two contracts is about when the liability for the items under transit changes hands from the seller to the buyer.
When you use the FOB contract, it means you can choose your carrier of choice as opposed to when you use the CIF contract in which case the seller would choose their carrier of choice, not necessarily the best one, because in there, in the CIF payment, they want to make a profit.
So should you buy CIF or FOB?
This depends on you entirely, but the best thing to do is to find out what suits you best. If you are a new buyer, it is better to buy CIF so that the hassle of arranging the transport of the car from the port of origin to your destination is taken off your hands. Let someone else deal with that while you prepare to take over the vehicle once it lands at your destination port.
A car is a delicate item and therefore it is better to wait to assume responsibility only when it lands in your port of entry. In addition, it could be hard for you to try to track the progress of the car in the high seas as you would have to rely on using the services of a shipping agent. If you are buying one car only, then it is just better to let the exporter handle the shipping arrangements for you as there is less stress that way. However, note that CIF always costs more than FOB and therefore if you import many cars for sale, you might want to consider FOB contracts.
FOB on the other hand comes in different arrangements. For example, in FOB prepaid arrangement, the seller of the car will pay all the shipping charges and will have passed these costs to the buyer. In the FOB origin arrangement, the seller will pay all the shipping charges and will then invoice the buyer for the same.
In FOB ownership arrangement, the seller and the buyer agree about who owns the car when it is still in transit because of insurance. If damage occurs to the car when it is in transit, it will be covered by the policy of the party that assumed ownership.
When your car gets to its destination, there will be more charges to consider. For example, if you are importing a car to Kenya, the following charges apply:
- 25% of CIF Import duty
- 20% of Excise Duty
- 16% VAT duty
- 2.25% Import Declaration Fee
- 1.5% railway development levy
- Port clearance charges
- Maritime surcharge levy
- Clearing agent fee
- Registration fee
- Shipping delivery order fee