Sat Nov 01, 2014 02:18 pm
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Car Financing and Auto Loans in UAE

Tips for those looking into getting a car financed. Calculate your costs using the Vehicle Financing Calculator

 

Discuss this at Autodealer Forum

 

You have finally found your dream car, and the dealer is telling you that you can afford it. Even you believe that you can pay the installment of a few thousand dirhams a month, and drive away in style. Unlike the real estate loan market, the car loan market in UAE is quite well developed with many players and products to choose from. Given the high competition, the consumer is the winner in this situation - given that you make the right selection.

This guide is meant to help you understand your car loan better, so that you do not end up for surprises - and hopefully provide you with some tools and tips to get you the best deal.

 

Cash or Loan?

Taking a car loan is not the only option, but many of us will not be able to purchase a vehicle without it. If you're loaded, then the cheapest and best option is to write a cheque for the total amount. But make sure you have money to spare for other essentials as well. Specially, if you have just moved to UAE, there will be a lot of expenses with setting up your new home. For instance, in UAE you are forced to pay rents 6 to 12 months in advance, which you might not be used to. Hence, don't put all your savings into outright buying a car.

 

Take the Dealers offer?

You have decided that you need a car loan. It is probably easiest to just let the dealer handle it for you. The dealer will probably tell you that he can give you an incredible rate and also insurance as part of it. Many times the deals are exceptionally good (specially with launch of new models), but not always. It is in your interest to check around first.

Many dealers make a lot of their money on financing. They have deals with lenders, often arranged so that the higher interest rate you pay, the more money the dealer makes. It's what they call their "back-end' business and it is highly profitable. Sometimes you will see deals with 0% interest for 6 months if you buy a certain model during the special seasonal promotion. Truth is that there is no one lending out money for 0% return. Its just that the returns are hidden somewhere else.

 

Flat Rate Interests

Almost all car loans in the UAE (and elsewhere in the world) are based on a flat rate interest, where the interest payment throughout the term of the loan is based upon the initial principal amount borrowed. This is in contrast to other loans like home mortgages which are based on interest being paid on a reducing balance.

In flat rate you pay the same installment every month of the term of your loan, while in reducing balance your installments become smaller every month as your interest reduces with time.

This also brings us to the point of where we see sometimes some incredibly low car loan interest rates. But don't let those rates fools you. For example, a flat rate interest of 6.5% for a 48 months period has an effective interest rate of about 12%, while a 4.5% interest rate has an effective interest rate of about 9%. When you compare this to how much interest you pay on your other loans, it does not look that cheap any more.

At Autodealer, we have created a special tool to calculate your installments and effective interest rates. This tool is available here.

 

Alternatives to car loans?

One may think that there are cheaper ways to borrow money to purchase a vehicle. In some cases there are, but the choices in the country are a bit more limited. In other countries, getting a home equity loan is normally much cheaper and also tax deductible (with the risk that your home is kept as collateral).

 

Which vehicles can one get loans on?

It is normally possible to get car loans on all new vehicles. The conditions and periods vary per make, with the cars that keep their values having better terms than those that do not.

It is also possible to get car loans for second hand cars as long as the car is not that old. Normally a car older than 4-5 years is hard to get financed. The reason being that these cars are also hard to get fully-insured, and the risk involved with financing this car is high. Some banks will finance older vehicles but only to a certain percentage of value, which they know they can recover in case someone defaults on their payments.

 

How to select who to borrow from?

When you are out to buy a car, you normally will find many different offers that will be difficult to compare against. The interest rate you pay can vary, and so can the down payment and other details, such as the value of your vehicle at the end of the loan term or the length of the loan you take.

The key is that don't let any one number dominate you. For example, a zero down payment or a really low down payment is not by itself a guarantee of a good deal. You need to consider all the numbers together to know what sort of deal you're getting.

Start off by using the Vehicle Loan Calculator tool available at Autodealer. It will give you an idea of the basic criteria of what your installments would be. The key figures to keep in mind here are:

  • Can you afford the monthly installment? Make sure that you are not spending all your spare cash to make this installment.
  • What is the effective interest rate you are paying? This lets you compare different companies that have different types of offers.
  • What is the total payment during the entire loan term? This tells you how much you are really paying for the car.

Also, don't just rely on the car financing company the dealer is recommending. Get independent quotes from other companies as well. A list of companies that do financing for car loans is available here. At some of the big show rooms like Al-Futtaim (Toyota, Honda, Automall), you will find many different financing companies operating out of there. Sometimes they are also given rooms within the show room premises where you can go and get quotes made out for you.

 

Some Final Tips!

Sometimes, dealers or banks offer very low interest rates for specific cars or models, but then they won't come down a dirham on the price. Or to qualify for that rate, you'll have have to sign up for 60 months. They hence, make their money in another way, and don't let that fact deceive you.

Another thing to also keep in mind is that in addition to interest payments there may exist other additional fees associated with payments or loan arrangement. For example, the interest difference per installment for a AED 100,000 car loan for 5% and 6% is AED 83 per month. One company might be offering you that difference in interest rate but getting back that is some administrative fees.

 

Also keep in mind that time is money when it comes to financing -- meaning that the longer your loan term, the more it will cost you. Some lenders are offering loans that run to 60 months. Think twice about these, as the interest rate will be higher than that of a 36 or 48 month loan.

 

In UAE, there are a lot of banks that will require you to transfer your salary payments to them before they will give you a loan. This can be cumbersome, and there is normally a way to negotiate away this demand. However, some banks justify offering the low rates based on making some money on your other business with them.

 

Final advice is to plan the duration (term) of the loan properly from the beginning. It is always possible to increase the loan duration, but if you reduce it you will end up having to pay a penalty, which is normally a few percentage of the loan amount.