Driving the Deal: 7 Essential Tips For Securing Car Financing

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. 

1. Understand Your Financial Position

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.

Read Also: The Process of Car Financing in Kenya.

2. Explore Different Car Financing Options

When financing your dream car, you have several financial options to consider. These include;

1. Bank financing

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. 

2. Micro Finance Institutions (MFIs)

MFIs are smaller, community-focused organizations that offer financial services, including car loans. Examples of MFIs that provide car loans include:

• Hakki 
• Kifedha
• Mogo 
• Platinum credit limited
• Watu Gari
• Mwananchi Credit Limited
• Ngao
• Izwe
• MyCredit
• BeesCredit

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.

3. Car dealerships

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. 

4. Savings and Credit Cooperative Organizations (SACCOs)

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.

3. Compare Interest Rates and Terms

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? 

Factors influencing interest rates and loan terms

• Credit score: A higher score could mean qualifying for lower interest rates and more favorable terms. Some institution types will only lend to borrowers with a credit score of a set threshold. In contrast, others, such as MFIs, can allow lower credit scores and borrowers with a history of defaults or without any credit history (first-time borrowers). 
• Downpayment: A larger down payment leads to lower monthly payments and may result in a lower interest rate.
• Late fees: Late payments can result in penalties and affect your credit score. Ensure you understand the consequences of late payments.
• Interest structure: Fixed rates remain constant throughout the loan term, making budgeting easier. Variable rates may change over time, potentially affecting your monthly payments.
• Early repayment: Some lenders impose prepayment penalties if you pay off the loan before the agreed-upon term. Others offer flexibility and allow early repayment without penalties. 
• Loan term: Shorter loan terms often come with lower interest rates but higher monthly payments, while longer terms may have higher interest rates but lower monthly payments.

Case Study: Comparing  the effect of interest rates, loan terms, and downpayment for local car financing

Background

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.

Key factors considered

1. Interest rates

• My Credit Limited Local Car Finance: This lender offers a monthly interest rate of 4.5%, resulting in a total cost (including fees) ranging from 4.6% to 7.5% per month.

• Ngao Credit Local Car Finance: Ngao Credit provides a lower monthly interest rate of 3.5%, leading to a total cost (interest plus fees) ranging from 3.56% to 6.17%.

2. Loan terms

• My Credit Limited Local Car Finance: Offers a flexible loan term duration, ranging from 3 months to 2 years,

• Ngao Credit Local Car Finance: Provides a slightly longer loan term, ranging from 3 months to 3 years.

3. Down payments

• My Credit Limited Local Car Finance: Finances up to 60% of the car's market value, which means a potential down payment of up to 40% may be required.

• Ngao Credit Local Car Finance: Offers financing of up to 50% of the car's forced sale value, implying a possible down payment of 50% may be necessary.

Practical Example

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.

Conclusion

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. 

Read Also: Factors to Consider When Choosing the Right Car for Your Lifestyle.

4. Budget for Additional Costs

Here's a rundown of extra expenses you should keep on your radar:

• Comprehensive insurance: It covers damages to your vehicle and also provides protection in case of accidents involving others.

• Logbook discharge fee: This is a charge imposed when a borrower settles their vehicle loan and obtains the release of their logbook.

• Logbook search fee: This fee is associated with verifying the authenticity of a vehicle's documentation, investigating its history, or confirming ownership.

• Car tracker installation:  This fee encompasses the cost of purchasing, installing, and activating a tracking device in your new vehicle.

• Post-approval fees: These are charges you encounter after your loan application has been approved. 

Read Also: What to Look Out for When Buying a Second-hand Car in Kenya

5. Be Prepared for Documentation

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. 

• Identification: You'll need a copy of your National ID card or passport. 

• Proof of Income: Lenders want to see you have a steady source of income. They may request your payslip, employment contract, or business records. 

• Bank Statements: You'll need at least six months of bank or M-pesa statements to demonstrate your financial stability.

• PIN Certificate: Your KRA pin is a tax compliance requirement, and lenders ask for it.

• Proforma invoice from dealership: It details the sale price of the car and the amount due.

• Logbook copy: It proves ownership of the car.

Read Also: Buying Your First Car? 8 Things You Need to Learn Today.

6. Negotiate and Read the Fine Print

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:

• Interest calculation methods: How is the interest on your loan calculated? Simple interest? Compound interest? Know the difference, and make sure it's in your favor.

• Late payment penalties: What happens if you miss a payment? Are the penalties reasonable or excessive?

• Clauses you need help understanding: If you stumble upon terms or provisions that feel written in Greek, seek clarification. 

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:

• Ensure compliance: Lawyers are well-versed in legal requirements and can verify if the loan terms comply with local laws and regulations.

• Protect your interests: They can identify clauses that may not be in your best interest and negotiate for more favorable terms if necessary.

• Prevent hidden costs: Lawyers can help uncover any hidden fees or unfavorable conditions that could result in unexpected expenses.

Read Also: Steps for Negotiating the Best Deal on a Car. 

7. Consider a Bigger Down Payment

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:

• Preserving liquidity: If you anticipate needing access to cash for emergencies, investments, or other financial opportunities, tying up a substantial down payment may not align with your liquidity needs.

• Income generation: In scenarios where you plan to use the car as a source of income, such as for ride-sharing services like Uber or as a matatu, you might prefer to allocate your funds towards acquiring multiple vehicles or investing in business operations.

• Credit building: If you want to build or improve your credit score, opting for a larger down payment may not be necessary. A consistent payment history on the auto loan can positively impact your credit profile.

Learn more: How to Save Up for a Big Purchase Painlessly.

Wrapping Up

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!