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Telltale Signs You Aren't Ready To Take a Car Loan
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Telltale Signs You Aren't Ready To Take a Car Loan

Applying for a car loan can be both an exciting and overwhelming process for those in search of the right loan, especially if you’re a first-time borrower. While the allure of a new car is undeniable, it's essential not to let that excitement overshadow the importance of thorough financial preparation.

If you go in unprepared, you might get your application denied or, at worse, get a bad deal that might hurt your finances.

Taking a car loan is a substantial financial commitment that can significantly impact your budget, credit score, and overall financial health. As such, you need to be certain you are ready for this commitment, as it's essential in avoiding potential pitfalls down the road. 

This article will explore some signs that suggest you might not be ready for a car loan and what you can do to prepare well.

Read Also: 10 Questions to Ask Before Getting a Car Loan in Kenya

You Don’t Have a Budget

Your budget will serve as your financial roadmap and help determine how much car loan you can afford. Several factors influence this decision, with your income and expenses taking center stage.

To begin, calculate the maximum amount you can comfortably allocate to car loan repayments without straining your household budget. 

For instance, if you earn Ksh100,000 monthly and have minimal financial responsibilities, you can dedicate up to 50% of your income to car upkeep and loan payments, making a short-term loan of 2 to 3 years viable.

However, if you have significant financial obligations despite the same income, you might need to reduce your car upkeep and loan payments to around 30% of your earnings and extend the loan term to 4 to 7 years.

Creating a well-defined budget prevents overborrowing and enables you to take a car loan that matches your financial capabilities. It ensures your monthly car-related expenses won't jeopardise your financial stability. 

Finally, ensure your budget is flexible and can adapt to unexpected events, such as income loss or a rise in interest rates. Your budget will also ensure you choose the right car for your lifestyle.

You Haven’t Saved For a Downpayment 

A car down payment is money (typically a percentage of the car's price) you pay upfront when buying a car. The amount varies from lender to lender, and multiple factors dictate how much you will pay, such as the price of the vehicle, your credit score, and the lender's terms. 

A down payment shows lenders you're financially ready, and it can increase your chances of loan approval. It also means lower monthly payments because your loan amount can be smaller if you pay 30% or 40% upfront. 

Additionally, you can get pre-approved for higher loan amounts if you have a substantial downpayment. A down payment can also give an upper hand when negotiating the interest rate, tenure, and other terms. 

However some lenders may offer 100% financing deals, but those can require a strong credit history or a co-signer, like your employer. 

Read Also: How to Save Money and Get the Best Deal When Buying a Car 

You Lack Job Security 

Auto loan lenders assess your income and employment stability to gauge your eligibility. A stable job hints at your ability to consistently make timely payments and makes you less of a credit risk.

If your income is irregular, such as when you rely on commissions, you are a freelancer, or you are self-employed, and your earnings fluctuate from month to month, it could raise concerns for lenders. The unpredictability may lead to situations where you struggle to meet your loan obligations, especially during months with lower income.

Addressing this issue can be challenging. You can't simply quit your job, so you'll need an alternative solution. Some effective strategies are to get a cosigner, increase your downpayment, improve income stability by getting a second job, offer collateral, or provide extensive income documentation such as tax returns and bank statements.  

You Have a Bad Credit Score or No Credit History

Your credit score considers various factors, including your previous credit applications and borrowing history. If you've had a history of loan defaults or delayed repayments, it can significantly lower your credit score, leading auto loan lenders to view you as a potential risk. This, in turn, could result in a car loan denial or less favorable loan terms.

Similarly, if you're a young individual just starting your first full-time job or someone who has never taken out a loan, you might have limited or no credit history. This lack can also make lenders hesitant, as there's no record to assess your debt management and repayment habits.

If you find yourself in either of these situations, there are steps you can take to improve your chances of loan approval. 

For those with bad credit, obtaining a CRB clearance certificate and settling outstanding loans is a good starting point. Meanwhile, individuals with no credit history can enhance their approval prospects by showing a steady income/job stability, savings, and a history of making reliable bill payments, such as rent. 

Read Also: What's Better – Taking a Loan or Saving to Buy a Car?

You Already Have too Much Debt 

Auto lenders often assess your Debt-to-Income Ratio (DTI) when evaluating your car loan application. DTI is a percentage that represents your monthly debt repayments compared to your gross monthly income. This ratio can be crucial in determining whether you're eligible for a car loan and its terms.

To calculate your DTI, start by tallying your minimum monthly debt payments. Then, create a separate list to determine your total income, including your salary and any supplementary earnings. Once you have these figures, divide your debt by your income and multiply the result by 100. 

Most lenders prefer to see DTI ratios below 36%, but there might be room for flexibility depending on the loan amount, repayment duration, and the specific lender's policies.

If you have a high DTI ratio, consider lowering your debt or increasing your income to comfortably afford a car loan without putting pressure on your budget.

Read Also: Mistakes to Avoid When Applying for a Car Loan

You Don't Understand The Hidden Cost of Car Ownership 

Before you apply for a car loan, consider the total cost of owning a car. Understanding the complete cost of ownership will allow you to make a more informed decision about the make, the model, and the loan amount of the vehicle you can afford. 

When considering auto loans, you should avoid focusing on the monthly payments alone. You might have to pay many one-time costs during and after the loan application stage. This includes origination/loan processing fees, agent/lawyer fees, taxes, and registration costs. 

They're also the recurring costs you should plan for as a car owner, which you’ll likely be shelling out, including fuel, car insurance, parking, and regular maintenance. Knowing these costs in advance helps you budget more accurately. 

Put together, these expenses can quickly add up; if you are unprepared for them, you are in for an expensive surprise.

Read Also: The 7 Hidden Costs of Car Ownership 

You Want a Car Loan For The Wrong Reasons 

Before considering a car loan, it's crucial to ask yourself if you genuinely need it and have a compelling reason for taking it. This will help you avoid falling into the trap of wanting a car loan for the wrong reasons, such as the desire to look rich or keep up with friends. This can lead to financial trouble down the road.

You need good reasons to take a car loan, and they can range from essential transportation needs for work, family or accessibility to starting a business such as driving for Uber. 

Additionally, you need to ensure you have explored other available car ownership routes, including saving and buying in cash. While this can delay your purchase, you can avoid interest and debt.

Finally, you should know that personal cars can be liabilities as they don't generate income. Before taking a loan to finance a liability, consider the depreciation and opportunity costs. 

Read Also: Driving the Deal: 7 Essential Tips For Securing Car Financing

You Haven’t Researched and Compared Lenders 

With many car loan products to choose from, it pays to research and compare different lenders thoroughly. 

Consider exploring your options among various financial institutions, including commercial banks, Micro Finance Institutions, Micro Finance Banks, and Saccos, as well as dealership financing and hire purchase offers. Each lender may offer different auto loan rates and terms, so comparing them is key to finding a deal that aligns with your financial situation.

You should also read the terms and conditions of a loan and check on extra costs apart from interest, such as upfront fees or penalties. Some lenders might charge you a prepayment penalty, while others won't. Finally, ask about the eligibility requirements and loan terms specific to each lender.

There is no one-size-fits-all auto loan, so take your time to shop around. Money254's free auto loans comparison tool makes it easy to research and compare lenders so that you can make informed decisions when you are ready to make a car loan application.  

Read Also: The Road to Smart Car Financing: Mistakes to Avoid When Applying for a Car Loan


Before you commit to a car loan, it's essential to get your finances in order. This step is a vital part of determining whether you're truly prepared for the responsibilities of car ownership. 

Start by evaluating your financial situation objectively. This involves examining your monthly expenses, debt-to-income ratio, outstanding debts, account balances, and other relevant factors. Being ready for a car loan means having confidence in your ability to make timely loan payments and cover the additional costs associated with car ownership effortlessly.

Finally, ensure you familiarise yourself with the pros and cons of taking an auto loan in Kenya. 

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.

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