Before you apply for a car loan, it’s important to know about specific red flags that can trigger a car loan rejection. Knowing what the red flags are put you in a better position to have your car loan application approved.
To enlighten us about these red flags associated with the car loan application process, we had a quick chat with Okey Udo, the Finance and Digital Product Manager, Autochek. As expected, he had some exciting insights to share.
Bad Credit Can Trigger a Car Loan Rejection
Chief amongst them is bad credit. Bad credit basically refers to a person’s history of failing to pay bills on time. It also highlights the likelihood that they will fail to make timely payments in the future.
When you are applying for a car loan, you don’t want to have bad credit. When you have bad loans, you will end up with a bad credit score. Bad loans refer to loans that you didn’t service and probably had to be written off.
These loans are usually reported to the Credit Bureau. It is required that every financial institution checks these credit reports from at least 2 different sources before they can make a credit decision.
If they check and find a record of a bad loan that was not cleared, then it will negatively impact your chances of getting your car loan approved. It amounts to an outright rejection except you have a letter of non-indebtedness.
With bad credits, it’s not just having your name on the bad side of getting a loan, your BVN sticks out to let the financial institution know that you have a history with bad loans.
This is also known as the DTI (Debt-to-income ratio) and it is really important. In Nigeria, you cannot use beyond 1/3 of your monthly income to repay a loan. This means even if you earn a high salary like one million naira and you have a loan you are paying N200,000 monthly to offset, any other loan you want to go for should not exceed 1/3 of your salary when added to the existing loan you are repaying.
If your DTI is higher than the stipulated 1/3, it will result in an outright rejection of your car loan application. What you might be able to do is liquidate an existing loan. If you are owing company A N500,000 and paying N100,000 monthly and you want to get a car loan of N2 million from company B, company B will pay company A the N500,000. This means you are then repaying a car loan of N2.5 million to company B. Company A is basically paid off so that you are not repaying 2 parties at the same time.
We should add here that the loan would then be stretched. For example, the repayment period could be stretched from 12 months to 18 months or even 2 years. That way, your DTI will be able to accommodate the loan.
This can also cause you to have your car loan application rejected. For instance, if you are a business owner applying for a loan and the bank wants you to sign a document stating that you are going to do business with the bank and you will not move the business to any other bank until the payment of the loan. If you refuse to agree to such conditions, it could end up with a rejection.
The financial institution might even request your cheque book. If you refuse, you are increasing the possibility of getting a rejection. These conditions depend largely on the financial institution involved and the specific documents that they request.
However, there are some basic documents that all financial partners request. For instance, at Autochek, our financial partners will request a copy of your utility bill. It is a mandatory requirement. If you submit other documents without a copy of your utility, your car loan application is very likely to get flagged for incomplete documentation.
The same applies to business owners applying for car loans from us. You will be required to submit your CAC document. Without it, your application will be flagged and rejected.
The Vehicle Type
This depends on the financial partner involved. Some of our financial partners have a rule around the age of the vehicle.
We see a lot of partners who do not offer car loans for vehicles that are more than 12 years old. We even have a partner who does not finance Ford vehicles but finances other vehicle brands.
In a situation where your preferred car is a locally used vehicle, you’re bound to get a car loan rejection. These are some of the red flags that can trigger a car loan rejection.