The right time to take a car loan is now. Interest rates for auto loans in the UAE have reached rock bottom, starting at 2.25 per cent, in the past six months.
Ambareen Musa, Founder and CEO of price comparison website Souqalmal.com, tells GN Focus, “Our data shows that on average car loan rates have decreased in the past six months by around 0.3 percentage points. From what we notice, local banks such as Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Abu Dhabi Commercial Bank and Dubai Islamic Bank were the major influencers of the decrease in rates. The rate for one of the loans on our database saw a drop of 3 percentage points over the past six months.”
Bankers agree, saying that given the increased competition, the market is set to be further differentiated by more features in existing products. The introduction of the Al Etihad Credit Bureau will also mean that the consumer’s credit history may affect the rates he or she is offered.
Tony Graham, Head of Retail Banking, United Arab Bank, tells GN Focus, “Auto finance has become extremely competitive in recent years, to the point where it is almost a loss leader for some lenders. With margins as thin as they are now and the higher processing costs associated with auto loans, rates are more likely to rise in the coming years.”
On the back of the newly buoyant economy, the sector picked up last year. R. Sivaram, Senior Vice-President, Head of Retail Assets and Cards Business, Emirates NBD, tells GN Focus, “In 2013, the auto finance industry has been one of the fastest-growing segments of consumer finance in the UAE, fuelled by the general increase in consumer confidence and the good growth in car sales.”
The trend will continue into the year. Tooran Asif, Head of Personal Banking, Mashreq, tells GN Focus, “Given the economic growth in the UAE, there is a buoyant opportunity in the auto sales business. In line with this, we anticipate the auto loans to grow steadily.”
Risky business
In the future, expect to get good loan rates depending on your credit behaviour. For some banks this is already the case. “We follow a risk-based pricing structure, where we reward customers who have an existing good relationship with us,” says Sivaram.
Emirates NBD provides auto finance of up to Dh1 million and business vehicle finance of up to Dh3.5 million. Interest and profit rates start from 2.49 per cent flat per year and approximately 4.6 per cent reducing rate.
Everything in the UAE’s loan sector is set to change as the Credit Bureau becomes central to the decisions. “With the imminent launch of the Credit Bureau in the UAE, auto loan pricing will be redefined on the basis the customer’s credit history,” Asif says.
When competition increases, companies seek to attract consumers by various means. Price cuts is the most obvious way, but that can only go so far. The next thing is packaged deals. “For banks, auto loans are a more attractive proposition when packaged with a suite of other products that cater to multiple customer requirements,” says Graham.
Likewise, Mashreq says it sees a good response for its bundled offerings. Its interest rates start at 2.35 per cent for flat and 4.32 per cent for reducing balance. The auto loan product is bundled with a Platinum Elite Credit Card, a free overdraft facility of up to Dh100,000 for the first year and a free current account. Customers also earn reward points for every Dh10,000 of loan.
New strategies
Asif says that consumers can expect more bundling options in the future from both auto majors and financial institutions. Newer loan products are also on their way, tailored for the unique needs of the UAE residents. “We anticipate the auto dealers and banks to come up with innovative strategies based on consumer behaviour. These are primarily buy-back guarantees with upgrades for repeat customers and extensive bundling of free service contracts from dealers, and step-up instalment payments [when the instalments are lower in the initial years but increase in the later years] and bullet payments [where the borrower only pays the interest over the period of the loan and repays the full principal amount at maturity] from the banks’ side.”
For the consumer, comparison shopping has never been more fun. Sivaram says that already Emirates NBD’s suite of products includes conventional fully amortising loan to a buy-back auto loan in association with the manufacturer and the dealer and a staggered instalment product that can alter a customer’s monthly payment outflow.
Most banks offer a first payment holiday, which means that you don’t start paying back the instalment when you are burdened with starting costs. In addition, says Sivaram, “We offer multiple schemes with flexible payment terms for our customers. These include special options for customers in the new to the UAE and new to the job segments as well.”
