Auto finance implies a four- to five-year financial commitment for most of us living in the UAE. The "deal" that you lock in today will have an impact on your personal budget for several years. A lot of us spend considerable time shopping around for the lowest rate, instead of looking for the best auto finance product for us. There is much more to an auto-finance than just a rate.
1. Be prepared: Do your homework before you visit the dealership: Be prepared and don’t allow the dealer to nudge you towards a particular bank. The auto dealer’s ‘preferred bank’ may not necessarily be the best fit for you. A good starting point may be a financial products aggregator such as souqalmal. That will give you an overview of what is available out there, including the range of market rates, the documentation required and any other qualification criteria.
2. Compare rates as well as fees: A low headline rate, with inflated processing fees, may mean that you actually aren’t saving at all. For instance, it doesn’t take a maths whiz to figure out that a rate of 2.49 per cent is better than 2.69 per cent. But, if you’re looking for Dh250,000 in financing over four years, then a 2.69 per cent rate with no processing fees is actually better than a 2.49 per cent with one per cent processing fees. You end up paying more on the lower rate financing!
3. Compare all the financial aspects: Find out the early settlement charges associated with any auto finance. Occasionally, you may be strapped for cash and need to skip a payment (postpone a monthly instalment), so find out if the product allows you to do that? Also, find out what it will cost you? Shariah-compliant financiers are likely to charge you a nominal fixed fee only, while conventional banks may charge you a fixed fee, plus add on additional interest as well.
4. Consider all other product features: Apart from the standard equal monthly instalment payment finance, there are some more innovative product structures out there. A “Balloon Financing” structure is an example. You do not pay the full amount of financing through monthly installments, instead, the payment plan is built in a way that will leave you with an outstanding amount to pay at the end of the finance contract. The advantage of such a structure is that you can lower your monthly instalments throughout the finance period. Alternatively, you can upgrade your purchase and afford a superior vehicle. But, you are left with a residual amount at the end of the finance period. You could then pay off that lump sum amount through one bullet payment at the end of the term, or, in some cases, through a trade-in/buy back guarantee offered by the dealer.
5. Managing down payment: You need to put up a minimum of 20 per cent of the vehicle value as a down payment. Individuals often choose the lowest required down payment because that minimises the immediate cash outflow. However, that means you have a larger finance amount to pay each month. There’s no reason why you cannot put up a higher down payment, if you can afford it. That reduces your monthly installments and it also means a lower total cost of financing.
6. Maximise value: Apart from the monthly payments, purchasing a vehicle also implies some running and maintenance costs. Make sure you consider all costs such as add ons for the vehicle, insurance and the cost of regular servicing. You could address some of these costs when you are choosing a vehicle by hunting for deals that will add value to your budget. For instance, some dealers will offer a trade in guarantee and freebies, such as free insurance for a couple of years and free servicing.
If you are looking for a pre-owned vehicle, remember the cardinal rule — “if its sounds too good to be true, it probably is.” It would be a good idea to narrow your search to pre-owned vehicles that are certified by reputed dealers. If you do decide to widen the search, do check the service history and, wherever possible, ask for the vehicle to be assessed at the local dealership. While this may be more time consuming and may also mean a cost of a few hundred dirhams, it could save you a lot of heartache and money.
By Mohsin Aikal
The writer is head of consumer finance at Noor Bank. Views expressed are his own and do not reflect that of the bank or the newspaper.
