A car is a valuable asset for an individual and for many, it is the second-most expensive asset after a house. Paying for a car in cash has become common since it eliminates worry about monthly instalments and payment issues associated with auto financing.
Thierry Seys, General Manager — Volkswagen, Al Nabooda Automobiles, says that in recent times, more vehicle buyers have opted for cash deals and the number of cash buyers has increased — 60 cash buyers to 40 finance buyers. In the past, it was 40 cash buyers to 60 finance buyers.
A mortgage-free car not only frees you from all the financial concerns, but it can also become your saviour during a cash crunch. Car-refinancing schemes offered by financial institutions help people borrow money against the value of their vehicle. Spencer Lodge, Managing Director, Fund Advisers, defines auto refinancing as a simple financial transaction that enables the car owner to release a certain percentage of the car value through a loan structure that creates liquidity and can improve the cash flow for the car owner to serve his requirements.
How it works
The make, model and value of your car would dictate the amount that is achievable as loan for the car owner. However, the key benefit for the borrower is that he continues to use his vehicle during the loan term and the loan amount serves his other needs.
Lodge says that financial institutions offer car refinancing facility to their clients wherein 70 per cent of the present car value is achievable as loan and in a few extremely unusual cases up to 80 per cent of the car value is obtained. Here, the lender determines the value of the car and not the owner.
Moreover, the maximum loan term offered by the institution is up to 60 months/five years, and the cost of borrowing offered currently is between 4-5 per cent. The car owner can obtain a maximum loan of up to Dh500,000 and in some rare cases, even higher, Lodge adds.
For the consumer
Drawing money from an existing asset to cater to the needs of today is what makes it a promising solution for the end user. Dubai-based car enthusiast Mohammad Al Musleh finds auto refinancing a great way to raise money. He has more than one rolling car and runs restoration projects that require cash flow. Using a car to generate some finance and run his projects, until one of them is sold, is a rewarding option for him.
Cost factor
Auto refinancing is a good way to obtain cash at lower interest rates.
Tooran Asif — Head of Personal Banking at Mashreq, in the UAE, says Mashreq is the only bank that offers refinance facility, hence the bank rates are lower compared to other lending products such as personal loan and credit cards. Moreover, most personal loans are offered with salary transfer undertaking and life insurance requirement, which is not mandatory during refinancing.
The bank facilitates any vehicle owner with clear ownership to avail of the car refinancing loan. The cost of loan would include interest rates starting from 3.35 per cent (reducing rate 6.13 per cent for one year), processing fee of 1 per cent of finance amount or minimum Dh500 and cost of evaluation certificate from franchise dealership, says Asif.
Document checklist
To apply for a loan, all borrowers must provide a valid passport copy with residence visa page for expatriates, car ownership document and evaluation certificate, and bank statements for three-months. If the borrower is self-employed or is a company, additional documentation required include trade licence copy and power of attorney. In case of LLC-Memorandum of Association or article of association, partnership agreement is needed. For salaried people, salary certificate (issued in the past 30 days) is required.
Review the product
Car refinancing allows people to make different financial decisions, but the negative side is that any loan product has a cost attached to it, hence reviewing and understanding the cost and terms of borrowing become
crucial factors.
Borrowing money for the right reasons is the key here since the borrowed money is returned with an added interest cost, points out Lodge. “If a client borrows Dh50,000 for five years at 5 per cent, then he has a 5 per cent compounded interest to pay to the bank each year until it is paid off. Other costs include administration or set-up fee that ranges from Dh500-Dh1,500. Some institutions charge a transaction fee as well.”
Moreover, the borrower must check whether the interest rate is variable or fixed, if there is any early settlement fee, and also study the terms and conditions and consequences if borrower does not repay the loan, he says. The borrower must be cautious and gather professional advice from the right people and research thoroughly to make sure that the loan structure makes sense in relation to his/her personal financial planning, Lodge adds.
— Special to GN Focus
