Do your homework when it comes to choosing auto finance

Choosing the right finance package when buying a vehicle is a complicated and costly affair.

If you take anything at face value and fail to do your homework, you can end up spending more on monthly repayments and charges.

To save a lot of money, consider some tips from the financial experts:

• Don't just walk into a bank and accept what they pitch to you. Shop around and you will see how interest rates, for example, can vary from one provider to another. "The banks are all competing for your business and if you shop around, it is very likely you will find a better offer elsewhere," says Richard Taylor of Acuma Wealth Management.

• Keep your loan as low as possible. Ideally, you should spend ten per cent of your net worth on a car, so if you are worth $100,000 (Dh367,228) after taking away all your liabilities, you can set aside $10,000 for your car purchase. Taylor doesn't find this a bad rule to live by, to stop you from splurging on your brand-new ride. "How much of that $10,000 that you wish to borrow is entirely up to you, but I would suggest that you keep it to a minimum."

• Ask your car dealer what they can offer you. Considering that dealers have in-house representation from the banks, you might get the best deal through them, suggests Steve Gregory of Holborn Assets. "Dealers may strike an arrangement with a bank from time to time for reduced interest rates on cars they sell. The banks offer lower rates in return for help with vehicles from the dealer in the event of default on the loan"

• Don't forget to check the internet for special offers and of course, check with your bank directly as well, for comparison.

• Interest charges may be fixed or calculated at a reducing balance rate. One bank may offer five per cent flat rate, while the other may have a higher rate, say nine per cent, but on a decreasing balance. The latter may cost less. "Be aware that an interest rate may apply to the borrowed amount for the whole repayment term. So, if you borrow Dh100,000 over four years, the interest will be calculated at the percentage rate per year on the amount, not on a decreasing balance. Ensure you work out what is best," advises Gregory.

• Always keep in mind that what you borrow is secured against the vehicle and also your freedom. If you fail to meet your monthly payments, the bank can take you to court and to prison. "The bank won't explain this to you when you borrow," says Gregory.

• You're normally required to pay a down payment of 20 per cent of the vehicle's value. Even if you know ways to avoid paying your share or someone else lends you the money, don't do it as it can backfire on you.

• Keep an eye on tricky loan terms and hidden fees, as there are loads of them. Your provider may require you to take out a payment protection insurance. Insist that you see the terms of the policy, Gregory advises. Find out if it includes redundancy, sickness or disability. Check if there is a limit on the maximum claim and if it is less than the loan balance at any time. "As always, check the small print and don't rely on what you are told verbally," adds Taylor.

• Determine what fees the bank will collect. When you add them to the loan amount and the interest charges, how much will it cost you? Watch out for fees if you miss a payment, default on your loan or settle it early. Most likely, your bank will not tell you about defaulting fees in advance as these include legal fees which are unknown at the application stage, according to Gregory.

"Some banks will charge you a big fee for early repayment while some may charge all the interest up front, so regardless of when you repay your loan, you will pay all the interest as if you held it for the full term. Avoid loans that do this," says Taylor.