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
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
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
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
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
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
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.