Taking the driver's seat when it comes to your finances: should you buy a car in cash or installments?
Now, how to pay for your new ride… Do you have enough money to pay for your vehicle in full? Does that wipe out your savings? Would it be better, instead, to hold on to your money and take out a loan paid over several years?
The answers depend entirely on your personal circumstances and preferences — but I’ve come up with a few questions that will help you make the right decision for you.
Do you have enough cash?
If you’ve got enough money, where are you keeping it? If your ‘savings’ are sitting under your mattress or in a current account not earning interest then it’s probably a good idea to make it work harder for you by buying your new car with that cash. After all, you aren’t using the money, and can now avoid paying interest on a car loan.
Think about it: Getting a car loan for Dh100,000 with an interest rate of 2.25 per cent will cost you an extra Dh2,250 per year in fees. If you don’t pay off your loan for five years, you would have paid more than Dh10,000 extra just for taking out a car loan.
On the other hand, if your money is making good returns, you might prefer to get a loan and leave your savings to work for you. If you’re earning a higher interest rate on your cash than you’re paying in interest on the loan, the interest will pay for the loan and you could still end up making money.
Are you comfortable spending your cash?
Having savings or an emergency fund gives us a sense of security, and spending it all on a new car can make people anxious. Also, if you do have an emergency, you’ll have to resort to selling your car in a hurry — and at a loss. So if you’re the kind of person who needs the security of back-up cash, taking out a loan is a better option. You can take a few years to slowly pay off your debt and still hold on to your savings.
If you don’t have enough cash, you’ll need a loan — but make sure you have enough for a down payment. Have a look at your cashflow and calculate how much money is coming in and going out. All car loans, bar Ijarah products, require a down payment.
Either way, you should aim to reduce, as much as possible, the risk of taking on a debt by ensuring you still have enough in your savings to cover you during unexpected events such as a job loss (what would be called ‘savings for a rainy day’ elsewhere!).
Will the bank give you a loan?
Your ability to take a loan from the bank depends on your debt-burden ratio (DBR). This is calculated as the portion of your monthly income that already goes on repayments to cover your debts. Based on your DBR, a bank will decide whether to lend you more money or not. If your DBR is above their maximum levels, the bank will consider you too risky.
For instance, if your monthly income is Dh10,000, and each month you pay Dh5,000 towards any existing debt, your DBR is 50 per cent. Having a high DBR means the bank will not lend you any more, and leaves you with no option but to pay in cash.
Can you take advantage of zero per cent?
Even if you have enough cash, a zero or low interest rate loan is very attractive. You’ll often find these deals during Ramadan or the Dubai Shopping Festival. However, before signing up, check what rate you will be offered once the three years is up; a huge interest rate in years four and five could wipe out the savings in years one to three.
If you’re in the position to choose cash or loan, check whether there are early settlement fees for that special deal during this zero per cent, three-year period. If not, or if they’re low, you could get a great loan deal, put your cash into a savings account and earn interest for the three years and still end up paying it off with the same cash later on.
Before deciding how to buy your dream car, take just a few minutes to evaluate all your financialoptions — the obvious one is not always the only or best choice you have. And even when you are in the enviable position of being able to choose between cash and a loan, always calculate the full cost before you leap to a decision. Remember, Souqalmal.com will help you find the best personal loan or savings account.
The writer is a founder and chief executive at Souqalmal.com. Views expressed by her are her own and do not reflect the newspaper’s policy.
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