10 Questions to Ask Your Lender Before Getting a Car Loan in Kenya

If you're planning to buy a car on loan, your first task should be to decide on the best car for your needs and have a budget in mind. 

Done with that? If yes, your next challenge is to find a suitable car loan lender. 

Once you start your search, you'll notice that you have hundreds of auto lenders to consider — from SACCOs to banks, microfinance institutions, online lenders, and yes, even your car dealer. 

That’s a great deal of options which in itself is a great thing - but without the right knowledge, it may be an uphill task to navigate, sometimes causing what psychologists call decision paralysis.  There are lenders whose terms appear competitive, but the devil is in the details.

Your goal is to land an affordable loan that meets your specific needs. Arming yourself with a list of questions to vet lenders eases the elimination process so that you find an auto loan lender that best matches your needs. 

Here are 10 important questions you should ask. 

1. What Are The Minimum Eligibility Requirements for Financing? 

The car financing process begins with prequalification, where a lender asks for some documents to determine if they can consider you for a loan and, if yes, how much.

These documents vary from lender to lender and may include:

• Personal documentation such as your Identity Card (ID)
• Kenya Revenue Authority (KRA) PIN
• A driving license
• Bank or M-PESA statements or recent pay slips
• A CRB clearance certificate or minimum credit score

If you don’t prequalify for a loan with a lender, you can:

• Try to prequalify with other lenders

Look for other lenders with less strict requirements like most microfinances.

Note that relaxed requirements often present more risk to the lender which can translate to higher interest rates and other loan costs such as late payment fees. 

• Try and meet some of the loan requirements like acquiring a driving license and getting cleared from the CRB blacklist

2. Is My Car Eligible for Financing?

Some lending institutions are selective in terms of the age, model, manufacturer, or origin of the cars they finance. A lender may reject your loan application if you want to acquire a car that's 8 years or older. 

Try flexible financing options

A car dealer may offer flexible financing since you'll be buying a car from them. Dealer financing, however, has its complexities. For instance, dealer loans can be more costly since most dealers act as brokers connecting you to an auto lender, and they charge you a markup on top of the lender's interest rate. 

Some microfinance institutions finance cars regardless of age, origin, and make, but this may be at relatively higher interest rates.

3. What Percentage of Financing Do You Provide? 

Some lenders give 100% financing while others require a fixed downpayment.

The percentage of financing you get can also depend on:

• The car’s age 

Most lenders require a larger downpayment for older cars, say 20% of the car's value. New cars may be eligible for 100% financing from some lenders.

• Your credit score

Your credit score speaks about your financial health. A good credit score implies that you have been paying your debts on time and are unlikely to default on future loans, qualifying you for a bigger loan. 

You can inquire about your credit score on Creditinfo, Transunion, or Metropol. 

• Your financial history

Proof of consistent income shown by your current payslips and bank statements can get you a higher loan limit. Some microfinance institutions will use your mobile money transaction history to determine your creditworthiness.

If you can't get adequate financing with a lender, you can:

• Consider other lenders with lower down payment requirements, which may, however, cost you more in terms of interest rates 
• Opt for a cheaper car model
• Try to meet some of the lender’s conditions. For example, you can save up for a downpayment

4. What are Your Loan Limits? 

Some lending institutions will have minimum and maximum lending amounts. 

Knowing an institution's loan limits will inform your planning such as the amount of savings you need, the type of vehicle you can qualify for and the time it will take you to qualify. 

If you want a Ksh200,000 loan yet a lender’s minimum loan amount is Ksh250,000, you'll have to find another lender with a lower minimum loan limit. 

For example, some lenders offer a tailored financing loan for cars intended to use for taxi-hailing services such as Uber, Bolt and Little. You will find they have a fixed upper limit of typically Ksh850,000 and a minimum downpayment of Ksh100,000. This means you must raise the additional amount to arrive at the actual purchase price.  

5. What are Your Minimum and Maximum Repayment Periods?

Most lenders allow for loan terms between 24 and 84 months.

The repayment term depends on several factors like the age of the car and how much down payment you make. Older cars generally have shorter loan tenures than newer cars.

When shorter tenures may be beneficial

Lower interest rates often accompany shorter tenures while longer terms may attract higher interest rates. Even when the interest rates are identical, the longer the tenure the more cumulative interest you will end up paying. 

If you can pay your loan quickly, say in 24 months, finding a lender who can accommodate your needs will help you save on interest costs. This could be in the form of zero early repayment penalties. 

When longer tenures may be beneficial

Longer repayment periods can, nevertheless, be beneficial in many ways, For example:

• Your monthly amounts will be lower, reducing the strain on your monthly income 
• If you are using the vehicle to generate income such as a taxi, longer repayments could mean the vehicle actually “pays for itself”. And, you can use the money you would have been directing toward paying your loan to achieve other financial goals as opposed to tying up a high proportion of your monthly income to loan repayments. 

6. What are Your Interest Rates?

It is important to note that the interest rate for auto loans, given the typically larger loan amounts and longer tenures, can be the single most important factor in determining the total cost of the loan.

Longer vs shorter tenures

As discussed earlier, auto lenders in the Kenyan market will charge varying interest rates depending on the loan repayment period.

Longer tenures typically attract higher interest rates than lower tenures - but this is entirely dependent on the institution. It can pay to go for a shorter term when you can, depending on the use you intend to put your vehicle to and your cash flow needs as discussed above.

Banks vs microfinance institutions

Banks will typically charge relatively lower interest rates than microfinance institutions but will have more rigorous eligibility criteria that may sometimes favour those who are formally employed. 

Navigating variable interest rates

If the stated interest rate is variable, you should always ask the prospective lender what you can do to get the lowest interest rate possible.

As stated in the eligibility requirements discussion, during prequalification, the documents the lender asks from you play an important part in determining your creditworthiness which then impacts the interest rate the lender charges you. As such, it is important to get your house in order before approaching a lender. 

7. What is the Interest Rate Structure?

A lender's interest rate structure will determine how much interest you will pay.

For instance, does your lender use a fixed interest rate structure or a reducing balance structure?

With a fixed rate, you pay equal monthly instalments until you clear your loan.

For a reducing balance structure, your interest is a percentage of your outstanding loan, meaning you pay less interest with time and save cash. 

You may lower your overall cost by choosing a loan structure where you pay the least interest rates. 

Make sure the lender explains to your satisfaction how the interest structure works. 

8. What are the Other Costs of Taking the Loan? 

In the hunt for lower interest rates, do not ignore other upfront and hidden costs that increase the overall cost of your loan. 

Some upfront and hidden costs you may incur are: 

• Logbook search costs
• Valuation costs
• Commitment fees
• Processing fees
• Excise duty
• Cost of installing a car tracking device
• Disbursement fees
• Late payment penalty
• Discharge fees (including early payment penalty and fees for refinancing your loan)

Check how these costs compare among lenders and how they affect your overall loan costs.

9. What are Your Insurance Requirements?

Insurance is big since it will be one of the costs you'll incur throughout your loan term. 

All lenders require proof of comprehensive insurance coverage before you can get your car from the dealer. 

Ask your lender if:

• The insurance cover includes credit life insurance (to provide lender compensation in case the loanee dies. If it does, that means more insurance costs on your side
• They require you to sign up with their list of pre-approved insurers only which keeps you from finding cheaper covers
• There are negotiated insurance rates when you sign up with their insurance partners so you can enjoy lower costs
• They provide Insurance Premium Financing (an insurance loan payable in monthly instalments) which will be handy if you could use a loan

You'll end up saving on insurance costs if your lender has favourable terms. Working with a lender's prequalified insurers also protects you from insurance scammers. 

10. What are The Conditions for Car Repossession? 

Life happens. You may end up in a situation where you are struggling to repay your auto loan. 

Find out a lender's conditions for car repossession and whether they charge loan default fees, such as late payment penalties, so you can prepare beforehand and avoid potential losses. 

Ask your lender if they provides options to save you from car repossession such as:

• Refinancing your car loan, which means getting a second lower-cost loan to pay your initial loan

• A chance to renegotiate your loan terms to make it easier for you to pay the loan

Compare refinancing options from other lenders as well before you make a decision. 

Do Not Settle

Don't be shy to shop around for your ideal loan. A slight difference in loan terms may translate to huge savings for you. 

Remember not to choose a lender based on a single factor, like interest rates, and overlook other charges that may not favour your specific needs. Consider a lender's overall terms and conditions and how they'll affect your total loan costs. 

You don’t want to just own a car, you want to get the best deal. With these 10 questions, you’re on your way to finding your most affordable lender. 

When you need help sorting through the huge list of auto lenders, Money254 saves you both time and money. We help you find the best auto financing based on your budget and specific needs so you can stop stressing and get to driving the car of your choice ASAP!