Reaching an early credit settlement

Transportation costs impose one of the first financial decisions expatriates have to make once they are in the UAE.

While many rent a car immediately after their arrival, buying starts to make much more sense as soon as they are settled, especially if they are planning to stay three to five years or longer.

Why? If the cheapest rental options in town are Dh1,200-Dh1,500 a month, you will find that you can drive the same car for much less if you take out a long-term financing arrangement or you can drive a much better car for that amount of money if you buy it.

For example, if the rental costs of a Mitsubishi Lancer with a 1300cc engine come to Dh1,500, you may be able to drive a Ford Mondeo with a 2,000cc engine or a similar car, including the insurance, if you finance its Dh60,000 price tag over five years at four per cent flat interest per year. At the end you can sell the car.

So are you heading yet to car dealers? One thing you should consider first is that getting rid of finance isn't as easy as getting finance.

Walk into any of the showrooms on Shaikh Zayed Road and you'll find bank agents trying to get you a credit approval within minutes. Call a bank and they will collect your contact information, and come back to you every day to remind you that you have a decision to make.

Penalties

"A good customer is the one who does not re-pay his or her debts on time," a bank insider told me recently. My understanding is that banks won't object to some extra income from delayed payment in the form of penalty fees and accumulated interest.

Therefore remember that even though a big part of the attraction of buying a car is to get the longest repayment period maybe 60-72 months, and the lowest monthly payment, ask yourself whether you are going to stay in the UAE for five to six years. If you're unsure, will you be able to afford to settle your loan at the end of, say, three years? To do your calculations correctly, you need to review each bank's terms and conditions on early settlement, and don't rush to the first bank that approves your loan request.

Two colleagues have told me recently their banks refused to drop any of the outstanding interest amounts when they requested early settlement of their car fin-ances, in addition to requiring an early settlement penalty fee of two per cent to three per cent of the outstanding amount. "I told the bank agent if I would have to pay the same amount either now or over a period of time, I would choose the latter," one said.

The other one, however, had no such option. He was an expatriate who needed to terminate his residency in the UAE. While he thought he could easily sell his car, the bank required him to re-pay the outstanding balance along with the interest and the penalty fee to be able to transfer ownership.

Communication

I have to admit their tales were disturbing. I was curious to double-check my car financing's early settlement terms. So when I called the bank to say I wanted to settle my car financing, all I got was: "Sorry ma'am. You've to visit your branch."

Isn't the whole transaction automated? Couldn't the customer service agent punch some keys, and know how much is outstanding? She wasn't willing even to elaborate on the terms and conditions in general.

So even though I came across the early repayment terms when I signed the contract, which says something about dropping the interest, the bank's website made no mention of this.

So I had to refer to my copy of the contract, which said in case of early settlement I would have to pay the outstanding capital amount plus 20 per cent of the outstanding interest on it, in addition to the two per cent penalty fee which like other bank fees might change without notice.

So why isn't it on the web? Could they have changed the contract terms without notice as they do with the schedule of fees? Even if they have, it shouldn't be applicable to previously-signed agreements. Otherwise, what does signing a contract mean?