Picture this. You've been eyeing your dream car for months. It embodies your hard-earned success and is your ultimate symbol of freedom. You can almost feel the leather seats beneath your fingertips and hear the engine's roar.
But as you step into the dealership, ready to make your dream a reality, the salesperson's words hit you like a bucket of cold water.
"Sorry, but your financing application has been declined."
Your excitement instantly turns to frustration, disappointment, and even a tinge of embarrassment. You wonder, "Why didn't they approve my application?" What went wrong?
You may have missed out on a few details. But fear not.
In this article, we’ll take you through seven tips to make securing car financing a breeze. Whether you're a first-time car buyer, have a less-than-perfect credit history, or simply want to optimize your financing deal, these tips will empower you.
First, add all your income. Your income includes your paycheck, any side gigs, or any other regular sources of cash.
Next, figure out your expenses. Your expenses include rent or mortgage, utilities, groceries, insurance, subscriptions, and other regular bills.
Once you have a clear picture of your financial position, ask yourself, "How much can I realistically allocate monthly for a car payment without jeopardizing my other financial commitments?"
The goal is to ensure your car payment fits comfortably within your budget, leaving enough room for all your other commitments.
Besides, there is a one-third 1/3 rule in the Kenya laws, which prevents lenders and creditors from deducting 2/3 of income from a borrower.
As such, you must assess your financial situation to ensure you’ll remain with more than 1/3 of your income even after the car loan deductions. Otherwise, your car loan application will be rejected based on income challenges.
When financing your dream car, you have several financial options to consider. These include;
Banks offer auto loans as part of their services. An advantage of bank financing is that it offers competitive interest rates, especially if you have a strong credit history. Banks also provide structured repayment plans and flexible loan terms, making it easier to manage your finances.
That said, banks have stringent eligibility criteria, making it challenging for those with less-than-perfect credit to qualify. Additionally, the approval process can be lengthy, causing delays in acquiring your vehicle that may be needed for business or other money-generating activities.
MFIs are smaller, community-focused organizations that offer financial services, including car loans. Examples of MFIs that provide car loans include:
MFIs often have more flexible eligibility criteria, making it easier for individuals with varying credit profiles to qualify. However, interest rates at MFIs can sometimes be higher.
Some car dealerships offer in-house financing options. Financing through a dealership can be convenient, with a simplified application process, special promotions, and faster approval times.
However, interest rates through dealerships can sometimes be higher than those banks offer.
Saccos have a wide range of financial products for its members, including car loan schemes. These loans can be advantageous due to lower interest rates and more flexible terms. Most of them offer loans up to 3 times your deposit.
When looking for an auto loan, you're not just looking for any loan but hunting for the right one. That's why you need to compare different lenders.
So, what factors should you consider when comparing interest rates and loan terms?
Mwangi is exploring financing options to purchase a local vehicle valued at Ksh1,000,000. He's considering two prominent lenders: My Credit Limited Local Car Finance and Ngao Credit Local Car Finance.
Mwangi is keen on understanding how interest rates, loan terms, and down payments offered by these lenders will impact the overall cost and suitability of the loan for his financial situation.
1. Interest rates
2. Loan terms
3. Down payments
Let's assume Mwangi opts for My Credit Limited Local Car Finance at an interest rate of 4.5% per month for a Ksh1,000,000 loan with a loan term of 1 year. His monthly cost would range from Ksh46,000 (4.6%) to Ksh75,000 Ksh (7.5%), and he would incur an upfront fee of Ksh3,500. Additionally, he may need to make a down payment of up to 40% of the car's market value, which amounts to Ksh400,000
On the other hand, if he chooses Ngao Credit Local Car Finance at an interest rate of 3.5% per month for the same Ksh1,000,000 loan with a loan term of 1 year, his monthly cost would range from Ksh35,600 (3.56%) to Ksh61,700 (6.17%). However, he would pay a higher upfront fee of Ksh6,000 and potentially need to make a down payment of up to 50% of the car's forced sale value.
Mwangi should carefully evaluate the factors of interest rates, loan terms, and down payments to make an informed decision regarding his local car financing.
The choice ultimately depends on his budget, monthly payment capacity, and willingness to make a substantial down payment.
Here's a rundown of extra expenses you should keep on your radar:
The necessary documents can distinguish between a seamless process and a bumpy ride.
Here’s a checklist of documents you might need when applying for car financing.
Nothing is cast in stone. You can negotiate for a better deal when car financing, especially if you have a good credit score.
Lenders are often willing to work with borrowers with a track record of responsible financial behavior.
Next, read the terms and conditions carefully. Pay close attention to:
Additionally, it's crucial to have a legal expert, such as a lawyer or financial advisor, thoroughly review the terms and conditions on your behalf.
Having a lawyer go through the terms is vital for several reasons. They can:
Have you ever felt that lingering dread of being stuck in a debt cycle? That’s where a more significant down payment can be your savior.
A larger down payment reduces your loan amount and shortens the repayment period. This means you'll be free from car loan payments faster and, best of all, pay less in interest over the life of the loan.
However, there are instances when opting for a large down payment may not be the ideal choice:
In conclusion, securing car financing in Kenya requires careful planning and informed decision-making. Keeping the seven tips we've discussed firmly in mind will be your compass on this journey to successful car financing. Wishing you a smooth journey to car ownership!