Check payment structure of auto loan

Question: I am looking at buying a new car and believe this is the best time with several companies launching their 2009 models. However, almost every bank offers auto finance facilities. How does one choose the right offer?

Answer: One of the first things to strike people when they go to buy a car in the UAE is the dizzying variety of auto financing packages that are available.

Almost every bank now offers a range of loans and terms, and many car dealerships have a direct relationship with different financial houses, so you can source financing and insurance directly from the showroom.

Such is the demand for cars that the UAE's automobile finance market reached $2.3 billion (Dh8.45 billion) in 2006, according to a report published by the Dubai Chamber of Commerce and Industry (DCCI).

Given the intense competition, the market is now filled with a variety of offers, with special incentives, flexible repayment schemes and different rates of interest all designed to tempt the consumer. So how do you know which is the best for you?

Perhaps the best place to start is with the basics. Firstly, decide whether you are opting for conventional or Islamic (Murabaha vehicle finance) package.

Then, look at both the payment structure and the terms of the financing agreement. One of the pitfalls that many first time-buyers fall into is agreeing to a long-term financing arrangement, in order to have a small down-payment.

The problem is that, although you're making smaller payments, you're making more of them over a long time, so that in the end, you're paying more for the car than it is actually worth.

This is a particular problem for cars, which are usually a fast-depreciating asset. If you want to trade in your car for a new model every year or so, you will find that being locked into a long-term financing arrangement is particularly problematic.

In addition, you need to look at all the charges associated with the loan. Many banks are looking to compensate themselves for the costs of giveaways and lower interest rates by adding additional rates to the deals.

This can range from high fees for late payments, service charges, and general fees. These charges need to be considered as part of the overall cost of the loan.

You should be equally cautious in your choice of vehicle insurance, which is a mandatory requirement. People often elect to get their insurance alongside their vehicle financing - often in the same car showroom! - while there are competitive offers available.

You will be offered comprehensive cover (which covers your vehicle in the event of accident or theft, as well as covering damage to third parties) and third party cover (which only covers the costs to other people or property).

Most loan companies insist upon comprehensive coverage, since it protects the asset - and it is generally the preferable option.

There are a number of factors that will determine the cost of the policy - the kind of car and your own driving record are both important - and you should always carefully examine the limitations and exclusions of the policy, so that you know how and where you are covered.

Advice from a professional financial consultant can be extremely useful for both auto financing and insurance. They will be able to advise you on the policy that best fits both your expectations and your financial situation.

Buying a dream car is one of the major aspirations for many people who live and work in the UAE - it's essential to make sure you can both afford your dream, and protect it over the long term.

Michael Walton is Director of General Insurance at Nexus, one of the the region's leading financial advisor. The answer is the author's and does not necessarily reflect the views of Gulf News. if you have any questions, please email at advice@gulfnews.com