9 Reasons Why Your Car Loan Application Might Be Rejected

Nowadays, a car has become more of a necessity than a luxury. It can be disheartening to get rejected when you need a car loan — it means that you have to postpone your plans to do business, create convenience around your family or work schedules, or enjoy some privacy during those long road trips. 

There are many reasons why your loan application may get rejected, but it boils down mostly to lenders doubting your ability to pay back the loan. 

Getting your car loan application rejected should not be the end of your car ownership journey. With proper preparation you can get past loan approval obstacles and fulfil your desire to become a car owner. In fact, why not prepare well from the very beginning and smoothen the process?

Here are 9 reasons why your car loan application may get rejected and tips to help you get approved. 

1. If You Don't Pre-qualify

Pre-qualification is the first step in the loan application process and requirements differ from lender to lender. Some lenders may require you to fill out an online pre-qualification form with your name, ID, residence, contact details, date of birth, and other personal information. 

Other details that lenders may request for during the pre-qualification process are your driving licence and your income and credit history. 

Some of the reasons why your loan quest may not go through at the pre-qualification stage are:

Poor credit history or CRB blacklisting

Some lenders, with your consent, will use the personal details you provide to obtain information on your credit history.

If you have defaulted on any loan including mobile money loans and have been blacklisted by the CRB, you may find it difficult to qualify for a loan from most lenders. Some lenders will, however, give you a car loan with no CRB checks. 

To know whether or not you are blacklisted by the CRB, you can register and check your status at one of the three licensed credit reference bureaus in Kenya; CreditInfo, TransUnion and Metropol.

You will need to clear your outstanding debts to obtain a CRB clearance certificate. You will then be eligible, at least at the prequalification stage, for a loan from lenders who require CRB clearance. 

Poor employment or income history (Irregular Income) 

Most lenders will ask for some proof of income, which could come in the form of a 3-month bank, income, or M-PESA statement. Lenders want to know not just how much money you make now, but if you can continue making that money in the foreseeable future.

If there's inconsistency in your cash flows or your income is deemed too low to qualify for a loan, you could get rejected. For example, issues such as constantly being out of work (or in self employment, very irregular income) or if you’ve been in your current employment for a very short time (period depends on the lender) may render you unsuitable for a loan. Note that this is never cast on stone - each lender will apply their discretion. 

If you're employed, a lender may also ask for a letter of introduction from your employer later in the loan application process to affirm that you still work for your employer and obtain a salary from them and also that you have not resigned. 

• Self-employment 

You may also find it difficult to get a loan if you've just started your self-employment journey and do not have a solid income history. You may need to have proper income records for at least two years if you're self-employed. This, again, depends on the lender - the main goal being they are trying to determine your ability to repay. 

Tips to navigate pre-qualification challenges

• If you are self-employed and do not yet have a regular income, you can ask your lender if they can accept other collateral for the loan such as your savings account or another car if you own one

• See if you can meet some of the prequalification requirements such as getting a driving licence. A driving course takes an average of 3 to 4 weeks - a license will typically be issued soon after passing the test. You can also get cleared with CRB if you’ve been blacklisted. Talk to the lenders that have listed you and pay as per your agreement then apply for an updated clearance certificate

• Work on getting alternative sources of income which will help you become more eligible for a loan. Some quick ways to get more money would be asking for a promotion at work or negotiating for a higher pay. Apart from low income,  Irregular income is the other factor that lenders may use to disqualify you. 

• Try and prequalify with other lenders such as microfinances or SACCOs who may have more relaxed requirements. 

2. Incomplete Vehicle Paperwork

Once you pre-qualify, the lender will require various vehicle documents to determine if they will approve you for a loan. 

These include an original logbook, import documents if the car is for import and proof of payment of import duties. Other documents that a lender might require you to present include valuation documents, a proforma invoice that shows the sales price and the downpayment, and logbook transfer forms. 

Your lender will typically not allow the loan process to proceed if you have no vehicle documentation or some documents are missing.

• Errors

If you have to fill in any forms manually, having illegible answers or incomplete or missing information may slow down your application process.

Lenders will, however, give you a chance to make the necessary corrections. Oftentimes, if you have missing documents, lenders will give you a grace period to put your documents together, after which they may reject your loan application if you don't comply. 

Tips to ensure you have your vehicle documentation right

• Check the lending institution's website or visit their premises and inquire about their loan application process and the documentation they need for the approval process to get all your paperwork right 
• Fill in any forms correctly. You can take advice from friends who have recently taken a car loan
• Double or triple-check your application before sending it in
• You can use the Money254 EasyApply process that is specially designed to help users get the details right with “always on”support from our team of relationship officers.

3. Vehicle Fails Valuation

Your lender has to determine the real market value of your vehicle since the vehicle acts as collateral for the loan and will be repossessed in case of default.

For most lenders, you will have to pay valuation fees from your pocket upfront, which may be non-refundable if the vehicle is not approved. Some of the valuation concerns that may lead to a loan rejection include:

A huge discrepancy between market value and sales value

The purpose of valuation is to give the lender a good estimate of the actual value of the vehicle (market value) as well as an estimate of the forced-sale value (the amount the vehicle can go for if it was to be sold at an auction without sufficient time to advertise). 

As such, if the sales value (that is the price that the seller is asking for) is much higher than the market value of the vehicle, the lender may decide not to approve your application. 

Why? As street slang who describe it, unagongwa - you are being ripped off! Simply, if the lender was to approve the amount the seller is asking for, it would be very difficult to recoup it if you were to default. 

The lender is unlikely to recover their money should they need to repossess the car which can inform the decision to reject your loan application. You may need to renegotiate with the seller or find an appropriately priced vehicle - remember, the lender cannot negotiate on your behalf. 

Read Also: Haggling: How to Bargain for the Best Deals

Alternatively, the lender can choose to give you financing only up to the market value of the vehicle and you'll have to find ways to raise the balance.

A doctored odometer reading

A low odometer reading on a car could signal that the car has not been used frequently and has undergone little wear and tear, making it more valuable. 

An old car showing a low mileage may raise a red flag as to whether the readings were doctored. Some dealers alter the odometer reading to a lower mileage so that they can sell the car at a higher price. 

Lender-assigned valuers will check for signs that an odometer has been altered, which may include scratch marks, loose screws, or fingerprints around the odometer area and may reject your loan application if the odometer reading is wrong. They will typically check importation records which is a surefire way of ascertaining odometer readings. 

Vehicle in poor condition

The lender may also reject your loan if during the valuation process big enough faults with your car are identified. 

This is solely based on the opinion of the valuer which could include the condition of the body, tires, suspension and mechanical components such as the engine and gearbox. 

This could actually be a positive thing for you since you would not really want to take a loan to purchase a car that is not in tip top condition. You will be servicing a loan while also spending more money repairing it. 

The downside is that, depending on the lender, you may not be refunded your valuation fee. But it is probably nothing compared to the costs associated with purchasing a vehicle that is in poor condition.

How to navigate car valuation challenges

• Check that you're not buying the car for too much more than it's worth, (getting conned) by buying from reputable dealers or getting the car thoroughly inspected by a competent mechanic before purchase.  

• Learn how to bargain to get a lower selling price from your dealer. If that fails, you could start shopping for another car

4. High Debt-to-Income Ratio

If you take a loan, you must pay it back in full and with interest. You are only able to pay it back from the income you earn monthly.

What happens if you are already using this income to repay some other loan and you now want to apply for a car loan (or any other type of loan for that matter)? 

The lender will have to calculate a debt-to-income (DTI) ratio which will show how the proportion of your monthly income that goes to rent repayment. 

If too much of your income is going to debt repayment currently, or if it is determined that if you were to be given the loan, too much of your income would be going to be going to debt repayment, your auto loan application may be rejected. 

If you are spending too much of your income on repaying loans, you are unlikely to meet your regular expenses including basics such as food and shelter. 

DTI is an indicator of how much debt you can afford to take up compared to your monthly income. 

You can calculate your DTI by dividing your debt by your monthly income. A high DTI, which many lenders consider to be from 50%, is an indicator that you have more debt than you can handle and cannot afford to take on more debt.   

If you're locked out of a loan because of a high DTI, you can:

• Consolidate your debt and pay it off before taking another loan
• Paying off one loan first, like a credit card loan, if you have the cash
• Negotiate a raise, a promotion, or get a higher-paying job

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• Find a lender with different DTI requirements but be fully aware of the possible financially devastating risks of taking up too much debt

5. When You're Asking for Tenure Longer Than 5 Years

Stretching your loan for too long, say 8 or more years, so that you make small payments may get your loan rejected especially because it may be hard to find a lender offering extremely long tenures for car loans.

This is simply because of the fact that cars are generally considered depreciating assets and if the loan is secured against a depreciating asset, it is not in the best interests of the lender to stretch out the term such that the forced sale value becomes too low to justify the cost of underwriting. 

Most lenders in Kenya offer for a maximum tenure of 5 years for an auto loan. Check the tenures a lender accepts before you apply and figure out if you are ready to take a car loan. 

How to Avoid Long Tenure Issues

• Save for a downpayment to reduce your loan obligation so that you can afford to apply for a shorter loan term
• Be realistic about finding a vehicle that meets your needs and has some of the features you want, but isn't going to break the bank
• Create a budget to see how much money you have left after your expenses and decide whether you can afford a car at this time and the type of car you’re most likely to qualify for

6. Asking for 100% Financing 

Most lenders in Kenya provide financing for up to 80% of the vehicle’s value. 

While you may find lenders providing financing for 90%, 95%, and even 100% of the car value, these are rare and may have special conditions such as short tenures, financing only for brand new cars or the requirement for additional collateral such as cash..

Either way, it's harder to get a loan when you are not ready to put down any deposit since it’s generally easier to default when you’re making super-large monthly instalments. 

You may also find yourself in an instant negative equity situation since new cars depreciate rapidly during the first 3 years.

Solutions to 100% car financing

• Save up for a deposit. A deposit of at least 20% of the car’s value is ideal but an even larger deposit is more likely to get you approved, and is just better for your peace of mind since you will have a smaller amount to repay. 
• Find a more affordable car. If you have to do 100% financing, that may be a sign that you’re not ready to buy a car

7. Applying for Financing for the Wrong Motor Vehicle Type

While some lenders may finance a wide range of vehicles, others only stick to one or two categories of vehicles. 

Some of the most common vehicle categories that local lenders finance are private and commercial motor vehicles.

Many lenders also provide financing for low cc PSV vehicles specifically meant for taxi-hailing services such as Uber and Bolt.

Fewer lenders in the market are open to financing PSV vehicles such as matatus, boda bodas, and tuk tuks.

You may also find lenders willing to finance the purchase of agricultural machinery.

Another category type away from the type of vehicle is on whether the vehicle is:- 

1. Already imported, duty paid and in the country but is yet to be driven by a private user in Kenya
2. Needs to be imported i.e. import financing 
3. Locally used and is being sold by an individual. 
4. Locally used and being sold by a company (at a yard) 

8. Age of The Vehicle

Some lending institutions will have an age and mileage limit to what vehicle they can finance. Some lenders consider a car that is more than 8 years old from its manufacture to be too old and may not offer financing. 

Lenders who provide import financing, for instance, do not give loans for vehicles that are more than 8 years old from the date of manufacture.

How to navigate issues to do with vehicle age

• Find a flexible lender such as a microfinance or your car dealer who may be willing to finance older cars
• Go for a newer but cheaper car model

9. Time Before Retirement 

You may have some challenges navigating the auto lending space if you are nearing retirement. Generally, lenders will only accept to give you a loan for a tenure that’s less than the number of employment years you have left. For example, if you have 3 years left, they may only allow you a 1-year loan tenure.

Some lenders will agree to finance your loan if you have retirement income, savings or investments such as pension, social security, or an individual retirement account (IRA).

Tips to help you get financing when nearing retirement

• You’ll have to prove to your lender that you have other sources of income such as  your savings or investments to repay the loan in case you default, but this means putting your retirement income at stake

• You can use other assets like an extra car as additional collateral for your loan

Shop Around and Prepare Beforehand to Avoid Getting Rejected

Always check a lender’s auto loan requirements and ask about the documentation required and the types of cars they finance. Complying with all the loan requirements will make your loan application process a breeze.

Be sure to shop around. There’s probably a lender willing to accommodate your unique financing needs. Money254 makes it stress-free to find a lender who matches your auto loan needs and reduces your chances of getting your application rejected. Check out our auto loans comparison tool today.