You’ve researched all the different car loan providers, picked the one that seems to offer the best deal, filled out their online application form, and…been rejected. What now? The car loan application can be an extremely frustrating experience. There are so many different factors that go into approving or declining an applicant, which means there are also numerous reasons why you might have been turned down by one lender but not others.
Unfortunately, lenders aren’t required to provide applicants with any information about why they were declined. This makes it difficult to know what to correct in your next application, which is why we’ve put together this helpful checklist of common reasons for rejection and advice on how to address them with your next application.
1. If you are not pre-approved.
Pre-approval is the first step in the car 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 may be requested during the pre-approval process are your driving license and your income and credit history.
Some of the reasons why your loan request may not go through at the pre-approval 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.
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.
Tips to navigate pre-approval 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 license. 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 that 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 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 microfinance or SACCOs who may have more relaxed requirements.
2. Incomplete Vehicle Paperwork
Once you are pre-approved, the lender requires various vehicle documents to determine if they will approve your car loan application.
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 down payment, 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. 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 car 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
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 car loan application rejection include:
A huge discrepancy between market value and sales value
The purpose of a 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 car loan application.
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.
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 sure fire way of ascertaining odometer readings.
Vehicle in poor condition
The lender may also reject your car loan application 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 be a positive thing for you since you would not 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 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
- 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 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