FULL GUIDE: The Process of Car Financing in Kenya

It’s 5 PM, and you are making your way home from work. Even if the day has been lengthy, it is not yet over. You still need to pick up your child from school or buy groceries for supper or accomplish a number of things before you can catch the bus or matatu back home. 

It will be around 7 or 8 PM by the time you get home if you factor in traffic etc. You finally secure a seat on the bus/matatu then you begin to think about owning a car. “No longer will I take the train, matatu, or bus.” “No more struggling in bad weather.” And many more thoughts play in your head

Regardless of your income level, getting a car is likely to be among your most significant purchases. If you are yet to own a home, it might be one of your most expensive purchases. 

The very first step is figuring out which brand and model is ideal for you. After ascertaining the approximate cost of acquiring the car, you can then seriously think about how to raise the amount. 

Some car owners may pay for their vehicles in cash and in full. This ideal route is possible for people who opt to save up for an extended period of time towards the target amount, have fairly high disposable income, already have much more than the target amount, and generally are confident the big expense will not be financially destabilising. 

A majority of people, however, choose to finance their vehicles. This can be because of the quick convenience of owning the car while repaying small amounts every month, the fact that the activities engaged in using the car could contribute to the ‘car paying for itself’, and the understanding that a car purchase should not come in the way of other longer-term financial goals that have to be fuelled by existing income streams. 

One of the in-between options is to save up a certain percentage of the expected total cost of the vehicle, such as 50%, and then apply for financing for the remaining amount. And it is generally good practice to do so since lenders will also finance typically up to 80% of the value of the vehicle. 

Car Financing Preliminaries

Getting auto/car financing or simply a car loan involves taking out a loan to buy a new or used car and then repaying the lender with interest over time. 

If you wish to finance your vehicle, you will need to shop around for a while to get a good deal. 

Typically, you are either going to ask your friends, colleagues, or family members about the lenders they have had an experience with if this is your first time, or you will visit the physical branches of these lenders to get the details in person.

The third option is researching online and seeing what different lenders are offering by reading through their individual websites and arriving at one that you think best fits your needs. 

This process may end up being a little time-consuming and not as productive if you are not well versed with what to look for. 

Luckily, there is an even more simplified process where you can go on a single website where all the car finance providers are listed and easily compare lenders, identify the best fit and apply for an auto loan from the comfort of your couch.

This way you are able to know how much you can borrow, what interest rate you will pay, and the repayment duration lenders are willing to provide you. You will realise the cost of the same amount of loans can vary massively from one lender to another. 

In addition to auto loan payments, other expenditures such as fuel, maintenance, insurance, and parking come with owning a new or used vehicle. Your monthly payment must fit inside your budget while paying off the loan as quickly as feasible.

While still thinking on this you should also consider whether you need maximum financing or just a top-up. This is depending on how much you have at hand and the cost of the car you want to get. 

One of the most important considerations when thinking about applying for a car loan is determining how much you can afford to pay comfortably.

Read Also: 10 Warning Signs You are Living Beyond Your Means

So now, what’s next?

You have settled on the make and model of the car you want, and the dealer you'll be getting your car from. You have even determined how much you will be able to afford and are now actively seeking financing. 

You have a few options when looking for a car loan; let's go over the most common ones. 

To begin, a bank is an example of financial organisations where you might get a loan directly. If you presently work with a bank or have a long-standing relationship with them, have a fairly high monthly income that is deposited through the bank, and do not have a history of defaulting on loans, this alternative may be more appealing to you. 

Banks typically may favour consumers with good credit and have strict requirements. A bank car loan may have fairly steep minimum eligibility requirements, but it may have a lower interest rate.

A car loan can also be obtained through a microfinance institution that has less strict application procedures, although it may attract a fairly higher interest rate as compared to banks. And if speed is your priority, you are often going to get the entire process completed typically faster than with banks. 

Any financial institution you choose to borrow money from becomes your lienholder. Simply explained, a lienholder is a loan provider who has a legal claim on your financed vehicle. 

Because the lienholder is financing the loan, they have a legal stake in the vehicle until the debt is fully paid off.

Now, let’s jump on the bank and microfinance institutions' processes. Shall we?

Option 1: Bank Car Financing Process

Step 1: Pre-Qualification

In this stage, the bank is trying to determine if you can qualify for an auto loan. If you have been banking them for typically more than six months, your account activity will be evaluated. If you are a new customer, the bank will request bank statements spanning six months or thereabout to determine your eligibility. 

Your employment status is also used to determine your eligibility as well as your CRB scores. When this has been done and you are found to be in good standing, you proceed to the next stage.

At the end of this stage, the bank - typically via your relationship manager or asset finance officer will give you a tentative estimate of what percentage of the vehicle’s value they can finance.

Note: This is not a commitment by the bank, but an indication of what they can possibly finance given the information they have - for example, 90% of the vehicle’s sales value. The bank will need more information about the vehicle including the year of manufacture and actual market value to give you a full commitment. 

‍

The bank will also give you a list of requirements it will need to be fulfilled by you to get the full commitment for financing. 

Step 2. Commitment Fee

The next several steps are aimed at fulfilling the bank’s requirements for you to actually get the financing you need. 

You begin by paying a commitment fee to the dealer/seller to ensure they take the car off the market since you have initiated the process of buying it. You don’t want to find the car has already been sold when the bank is ready to finance it for you.

The amount is typically not cast on stone but agreed upon between you and the seller. It is typically a low amount such as Ksh10,000. 

Step 3: Valuation

Once the car is off the market, the bank requires that a valuation be done to determine the true market value of the vehicle they intend to finance. 

A valuation also, importantly, determines the forced sale value (FSV) of the car. What is a forced sale value, you ask? This is the sale price the car can reasonably go for if it was put on sale for a period that was too short to allow for proper marketing. 

Remember, this is a loan. So, the bank wants to know in the event of a default how much the car would fetch if it was to be disposed of (after repossession) within a short timeframe.  

Then, remember there is the actual sales price of the car - which is the actual amount you are actually paying the dealer. The valuation will give the bank the market value of the car which is a huge discrepancy exists might inform a decision not to finance the purchase - for example, if the sales price is significantly higher than the actual market value, it may indicate the seller is conning you/ripping you off. 

The valuation report is sent directly to the bank and you receive a copy. 

NOTE: You will be responsible for footing the cost of the car valuation.

Step 4: Pro-forma Invoice and Other Documents

This is a document prepared by the dealer/seller indicating the sales price of the car and the commitment fee that you have already paid - indicating the balance that needs to be paid. 

The dealer is also required to provide the bank and yourself with copies of the vehicle’s registration documents i.e. the logbook and import documents if it is for import. 

Personal documents

At this point, the bank will also require you to supply them with the following documents;

1. If you have not been an existing customer, months of payslips and bank statements from your previous bank
2. You may be also required to change your salary account to the bank offering you the financing
3. A letter of change of paypoint from employer - your employer acknowledges that they will henceforth be paying your salary to the account you have created in the financier
4. A mandatory letter of introduction from your employer - your employer affirms that you actually work for them, have not resigned, and draw a salary from them
5. 
   

At the end of this stage the bank has received;

1. A copy of the valuation report indicating the market value and forced sale value of the car
2. A proforma invoice from the seller detailing the sale price of the car and the amount due
3. Copy of the car logbook and/or import documents
4. Persona documents that detail your income and confirm your employment details

Step 5: Offer Letter

Once the bank is satisfied that you are eligible for car financing and from the valuation report and vehicle documents that the car can be financed, the credit department determines how much of the actual sales value of the car it can finance and makes you an offer. 

So, for example, if the car is being sold for Ksh1 million, the bank can determine that based on your risk profile, the car’s year of manufacture, and your credit report, they will offer you 80% financing i.e. a car loan of Ksh800,000.

Note that at the pre-qualification stage, the bank only gave you a tentative offer pending more information i.e. valuation and the documentation above which it uses to give you a substantive offer. In our earlier example, the tentative offer was 90%. 

The offer letter will also indicate a validity period which is typically between three weeks to three months.

This is the period within which you are supposed to comply with the remaining requirements for the bank to actually disburse the amount to the seller. 

At the end of this stage;

1. You have a substantive offer from the bank with an expiry date
2. You are then required to comply with the remaining eligibility requirements for the money to be disbursed

1. These requirements include raising the amount you need to top up, otherwise referred to as deposit i.e 20%, installing a car tracker, getting comprehensive insurance, and securing NTSA In-charge.

So far, so good? 

Step 6: Compliance

The next step is to comply with the remaining requirements. 

1. Raise Deposit

Now that you know how much the bank will be financing, you have to raise the remaining amount. From our example, this is going to be Ksh200,000. This, you will pay to the seller directly who will then issue you with an updated pro-forma invoice.

The seller will share a copy of the updated pro-forma invoice with the lender proving that you have paid the full deposit amount. 

2.  Install Car Tracker

Remember, this is still a loan. The lender needs to be sure you are not going to disappear with the vehicle before honouring your end of the bargain. You are required to install a car tracking device at your own cost. Note that you have to adhere to the car track device specifications given by the lender if they are specified. 

The car track installer (typically approved by the lender) will share the login details with you and with the lender.

3. Buy Comprehensive Insurance 

You will have to buy a comprehensive insurance cover for the vehicle. This is to ensure that in case of an accident involving the vehicle during the loan tenure, there is indemnification thus protecting the validity of the loan agreement. This is also done at your own cost. 

4. NTSA In-Charge

‍
The seller has to transfer the ownership of the car to both the lender and yourself using the NTSA TIMS service. The bank will appear as owner 1 and you will appear as Owner 2. For the duration of the loan, the vehicle will be owned by both you and the bank. 

This is done by the seller at your own cost. 

You will have to present the bank with proof of NTSA In-charge in the form of a TIMS receipt. 

Note: the above four compliance items can be done simultaneously. You will typically need to make the NTSA in-charge before you can secure a valid comprehensive insurance cover. 

So far so good? 

Step 7: Release Order

After the bank receives all of the above documents and valuation report and is happy with the compliance, it will send a release order to the seller and another copy to you.

This essentially tells the seller that within a given period of time the owed amount will be deposited into their bank account and they can allow you to drive off!

Step 8: Vehicle Handover

Now you’re almost there! 

The car dealership/seller upon receiving the release order, will either give you the car or for some, you’ll have to wait until the bank disburses the money before you pick up your car.

And then, all you have to do is make sure you follow the repayment terms to make sure you do not run the risk of car repossession. 

Option 2: Microfinance Institution (MFI) Car Financing Process

The second option is financing a car through a microfinance institution. If you are self-employed, have bad credit or no credit at all, or don't have a regular income, this is the to-go option for you.

Is the process different from a bank? you may ask. Well, not exactly very different

The most significant difference between the application process at an MFI compared to a bank is that MFIs will accept M-PESA statements as a way of showing credit eligibility when banks do not. The second difference is that MFIs can make the process noticeably faster from application to disbursement as compared top commercial banks.

Below is the process of applying for an auto loan through an MFI. Note the similarities with the bank process are not discussed in detail in this section…

Step 1: Pre-Qualification

Step one is pre-qualification. Well, just like banks, you will need to be prequalified before a commitment and offer are made. 

With MFIs however, you can use even your M-PESA statements alongside your bank statements if you are self-employed as a demonstration of your credit eligibility. 

Some MFIs also check your CRB score although you will not be expressly disqualified just based on your credit history. Remember, this is not a loan application or a guarantee of financing. It is the very first step, just like for banks, in determining if you stand a chance of qualifying for the loan.

At the end of this stage;

1. Just like banks, you will have a tentative offer of what percentage of the vehicle could be possibly financed
2. You will have a list of requirements to fulfil before the MFI can fully commit to financing your purchase

Step 2: Commitment Fee

Just like banks, you will have to pay the seller a commitment fee so that they can take the car off the market as you embark on the process of fulfilling the requirements set by the MFI to get its full commitment.  

The amount depends on your agreement with the lender and can be as low as Ksh10,000. 

Step 3: Valuation

The car will have to be valued just as in the bank process to ascertain the market value and the forced sale value. Refer to Step 3 in the Bank section above for more details on this.

Step 4: Compliance

This step compresses Steps 4, 5 & 6 in the Bank Auto Loan process section above. 

After valuation, a valuation report is sent to the MFI detailing the market and forced sale value of the car.

The dealer/seller is required to furnish the MFI with a copy of the car logbook, a sale agreement, and a proforma invoice detailing the actual sale value of the car and the amount you have already paid (commitment fee).

If the car you intend to purchase is a locally used one, that is all you need to provide at this stage. If it is foreign used, import documents will also have to be submitted. 

Once the MFI is happy with the information supplied, they will give you an offer letter which is referred to as a letter of undertaking which is where they will detail the exact percentage of the vehicle they will finance and act as a commitment to pay the dealer the same. 

With the letter of undertaking, a transfer of ownership will be done (the logbook will be put under joint ownership between you and the MFI). A car tracker will be fitted to the car and you will also have to pay for comprehensive car insurance.

Don’t give up, you’re almost there! 

Once the preliminaries indicated above are done, the MFI will then disburse the money to the car dealership.

And now, you can drive your car home!

WRAPPING UP 

When you repay your car loan in full, NTSA will get a lien release document from your lender and the vehicle's logbook will subsequently be updated to show that you are the only owner and handed over to you.

If you do not make your payments on schedule, your lender may repossess your vehicle.

So when you decide to take out an auto loan, you should grasp the consequences of your lender's financial commitment since you won’t be the only one who has a stake in your vehicle.

There are various aspects to consider before acquiring a new car. What kinds of security features are available? What are the operating expenses, and how efficient is it in terms of fuel? Is it for work, pleasure, or a mix of the two? The list is endless.

You should be able to swiftly and easily put an end to the pressing problem of how you'll finance your purchase by creating a budget, selecting a trusted lender, and obtaining the best rate.