With several banks and financial institutions offering convenient auto financing options, car ownership has become easier in the UAE. However, it can become difficult when people opt for a specific make and model without evaluating what actually suits their pocket. The following budget fundamentals can help you prevent the negative effects of auto financing.
Income-debt ratio
Do a thorough research on what car will meet your needs and budget. The income-debt assessment would determine how much finance is available from the bank and the down payment required for your desired vehicle. Mohammad Jamil Berro, CEO, Al Hilal Group, says that there is no mandatory rule on what percentage of income you can spend on your car purchase, however, regulators will permit a maximum of 50 per cent of income against instalments on the total finance that an individual has taken. “The bank conducts an assessment and ensures that the Central Bank’s requirement of a 50 per cent average debt ratio rule is followed. If the customer’s instalment is beyond 50 per cent, then the down payment is increased or a more affordable car is recommended,” he adds.
Finance rate
Figure out the instalment amount you can afford to set aside every month to pay for the car loan and check the finance rate since this will directly reflect on the instalment amount. “Banks/financial institutions typically finance up to 80 per cent of the cost of a new car as per the UAE Central Bank regulations and they look at the individual’s repayment capacity to service the car loan with a margin of safety,” says Siddarth Razdan of I Capital Management Services, a corporate finance advisory firm. Finance rate that a bank offers on car loans, thus, may vary on individual case-to-case basis wherein people with good credit history with banks may achieve better rates and vice versa. This interest/profit rate has a vital effect on the instalment value, that is, a higher finance rate would translate into higher EMIs, thus affecting the individual’s planned budget scenario, Razdan adds.
Loan term
Another factor that influences the instalment value is finance tenor. A shorter term would mean higher EMIs and longer loan period would mean somewhat lower monthly payments, but the total charge for credit will increase in line with the term. Berro says that according to the Central Bank, the maximum finance tenor for vehicle financing is five years. Moreover, banks would decide internally on the maximum tenor for different makes and models, but it cannot go beyond five years as per the regulatory guideline, he adds.
Down payment
For obtaining a car loan in the UAE, 20 per cent of the total car value has to be paid as down payment. The higher the amount, the lower will be the size of your borrowing and thus your monthly payment. This could be in form of cash down payment plus the value you obtain from the trade-in of the existing vehicle. There are several vehicle dealers in the market that will trade in used vehicles for new vehicles and add that amount as a part of the down payment for the new one, thus reducing the size of your borrowing.
Other costs
Buy a car that is financially viable in the long run, which means vehicle acquisition planning is more than just evaluating the vehicle cost and instalment amount. Berro advises that when buying a car, consider yearly expense of paying insurance, which may be quite high for some of the vehicles. Moreover, he adds, calculate the cost of petrol and maintenance, since some vehicles may incur high maintenance costs, which may not be apparent to buyers.
— Special to GN Focus