Step 1: Pre-Qualification
In this stage, the bank is trying to determine if you can qualify for an auto loan. If you have been banking them for typically more than six months, your account activity will be evaluated. If you are a new customer, the bank will request bank statements spanning six months or thereabout to determine your eligibility.
Your employment status is also used to determine your eligibility as well as your CRB scores. When this has been done and you are found to be in good standing, you proceed to the next stage.
At the end of this stage, the bank - typically via your relationship manager or asset finance officer will give you a tentative estimate of what percentage of the vehicle’s value they can finance.
Note: This is not a commitment by the bank, but an indication of what they can possibly finance given the information they have - for example, 90% of the vehicle’s sales value. The bank will need more information about the vehicle including the year of manufacture and actual market value to give you a full commitment.
The bank will also give you a list of requirements it will need to be fulfilled by you to get the full commitment for financing.
Step 2. Commitment Fee
The next several steps are aimed at fulfilling the bank’s requirements for you to actually get the financing you need.
You begin by paying a commitment fee to the dealer/seller to ensure they take the car off the market since you have initiated the process of buying it. You don’t want to find the car has already been sold when the bank is ready to finance it for you.
The amount is typically not cast on stone but agreed upon between you and the seller. It is typically a low amount such as Ksh10,000.
Step 3: Valuation
Once the car is off the market, the bank requires that a valuation be done to determine the true market value of the vehicle they intend to finance.
A valuation also, importantly, determines the forced sale value (FSV) of the car. What is a forced sale value, you ask? This is the sale price the car can reasonably go for if it was put on sale for a period that was too short to allow for proper marketing.
Remember, this is a loan. So, the bank wants to know in the event of a default how much the car would fetch if it was to be disposed of (after repossession) within a short timeframe.
Then, remember there is the actual sales price of the car - which is the actual amount you are actually paying the dealer. The valuation will give the bank the market value of the car which is a huge discrepancy exists might inform a decision not to finance the purchase - for example, if the sales price is significantly higher than the actual market value, it may indicate the seller is conning you/ripping you off.
The valuation report is sent directly to the bank and you receive a copy.
NOTE: You will be responsible for footing the cost of the car valuation.
Step 4: Pro-forma Invoice and Other Documents
This is a document prepared by the dealer/seller indicating the sales price of the car and the commitment fee that you have already paid - indicating the balance that needs to be paid.
The dealer is also required to provide the bank and yourself with copies of the vehicle’s registration documents i.e. the logbook and import documents if it is for import.
At this point, the bank will also require you to supply them with the following documents;
- If you have not been an existing customer, months of payslips and bank statements from your previous bank
- You may be also required to change your salary account to the bank offering you the financing
- A letter of change of paypoint from employer - your employer acknowledges that they will henceforth be paying your salary to the account you have created in the financier
- A mandatory letter of introduction from your employer - your employer affirms that you actually work for them, have not resigned, and draw a salary from them
At the end of this stage the bank has received;
- A copy of the valuation report indicating the market value and forced sale value of the car
- A proforma invoice from the seller detailing the sale price of the car and the amount due
- Copy of the car logbook and/or import documents
- Persona documents that detail your income and confirm your employment details
Step 5: Offer Letter
Once the bank is satisfied that you are eligible for car financing and from the valuation report and vehicle documents that the car can be financed, the credit department determines how much of the actual sales value of the car it can finance and makes you an offer.
So, for example, if the car is being sold for Ksh1 million, the bank can determine that based on your risk profile, the car’s year of manufacture, and your credit report, they will offer you 80% financing i.e. a car loan of Ksh800,000.
Note that at the pre-qualification stage, the bank only gave you a tentative offer pending more information i.e. valuation and the documentation above which it uses to give you a substantive offer. In our earlier example, the tentative offer was 90%.
The offer letter will also indicate a validity period which is typically between three weeks to three months.
This is the period within which you are supposed to comply with the remaining requirements for the bank to actually disburse the amount to the seller.
At the end of this stage;
- You have a substantive offer from the bank with an expiry date
- You are then required to comply with the remaining eligibility requirements for the money to be disbursed
These requirements include raising the amount you need to top up, otherwise referred to as deposit i.e 20%, installing a car tracker, getting comprehensive insurance, and securing NTSA In-charge.
Step 6: Compliance
The next step is to comply with the remaining requirements.
1. Raise Deposit
Now that you know how much the bank will be financing, you have to raise the remaining amount. From our example, this is going to be Ksh200,000. This, you will pay to the seller directly who will then issue you with an updated pro-forma invoice.
The seller will share a copy of the updated pro-forma invoice with the lender proving that you have paid the full deposit amount.
2. Install Car Tracker
Remember, this is still a loan. The lender needs to be sure you are not going to disappear with the vehicle before honouring your end of the bargain. You are required to install a car tracking device at your own cost. Note that you have to adhere to the car track device specifications given by the lender if they are specified.
The car track installer (typically approved by the lender) will share the login details with you and with the lender.
3. Buy Comprehensive Insurance
You will have to buy a comprehensive insurance cover for the vehicle. This is to ensure that in case of an accident involving the vehicle during the loan tenure, there is indemnification thus protecting the validity of the loan agreement. This is also done at your own cost.
4. NTSA In-Charge
The seller has to transfer the ownership of the car to both the lender and yourself using the NTSA TIMS service. The bank will appear as owner 1 and you will appear as Owner 2. For the duration of the loan, the vehicle will be owned by both you and the bank.
This is done by the seller at your own cost.
You will have to present the bank with proof of NTSA In-charge in the form of a TIMS receipt.
Note: the above four compliance items can be done simultaneously. You will typically need to make the NTSA in-charge before you can secure a valid comprehensive insurance cover.
Step 7: Release Order
After the bank receives all of the above documents and valuation report and is happy with the compliance, it will send a release order to the seller and another copy to you.
This essentially tells the seller that within a given period of time the owed amount will be deposited into their bank account and they can allow you to drive off!
Step 8: Vehicle Handover
The car dealership/seller upon receiving the release order, will either give you the car or for some, you’ll have to wait until the bank disburses the money before you pick up your car.
And then, all you have to do is make sure you follow the repayment terms to make sure you do not run the risk of car repossession.