Finding an affordable car loan

You've seen your dream car and you want it. You've researched it on the internet, you've taken it for a test drive and you've fallen completely in love with it. The only problem is, you can't afford to buy the car outright and you're reluctant to take out a loan. Given the current economic climate, it's understandable that consumers are feeling cautious over borrowing money. However, according to the experts this is a good time to take out a loan.

"With the current spate of offers by dealers on cars, it is a good time to buy a car on finance," says Sundar Parthasarathy, Head of Consumer Assets, Abu Dhabi Commercial Bank. "The car sales market has seen growth in the third quarter as compared to the first quarter this year as confidence is rising and encouraging more customers to finalise the purchase of cars."

Before you head out car shopping, it's imperative you do your car loan homework to ensure you get the best deal available. "Unless you are one of the fortunate few, most of us would have to approach a bank to secure funding for the purchase of that new or used dream car," says Marwan Mahmoud Hadi, Managing Director, HSBC Middle East Finance Company. "This could easily turn out to be an arduous task if you are not streetwise when selecting the financier, as competing banks will bombard you with numerous promotions and promises."

Closer look

In order to get a transparent, well-structured and affordable deal, Hadi recommends that you consider factors such as taking a rounded view of the lender's experience, product availability, total agreement cost and ease of processing and transacting your application. "Let's start with the interest rate factor, as most advertising and offers are centred around this aspect. To put this into perspective, a 0.25 per cent reduction in interest rate equates to Dh20 per month, based on a loan amount of Dh100,000. Hardly an amount that will influence your decision on the type of vehicle you wish to purchase. This is proof that headline interest rates alone do not provide affordability."

Hadi says that consumers should be aware that loan tenures have a large influence on affordability. "Some financial institutions offer loan tenures for up to 72 months, once again with the aim of increasing monthly affordability. The downside to extended tenures is something called negative equity. Negative equity purely refers to the outstanding loan amount versus the present market value of your vehicle at any given point in time. Customers could potentially find themselves in a situation where the outstanding loan amount is indeed higher than the expected market value, which could result in difficulty to sell the vehicle, should the need arise. Given today's economic circumstances, this factor is much more relevant than before."

Various products

Another thing to consider, according to Hadi, are the various vehicle finance products and their associated benefits. "Firstly, and perhaps the most well-known method of vehicle finance is a hire purchase agreement, structured as a fully amortised loan, paid back over a specified tenure. This method is most preferred by customers wishing to own their vehicles and perhaps retain them for longer periods.

"Secondly, Murhaba transactions are structured on Sharia principles and provide customers with the same benefits as the conventional hire purchase agreement.

"The next loan option is structured with deferred payment in the form of hire purchase balloon payments. The logic of balloon payments is that the customer does not pay for the full value of the vehicle as is the case with a hire purchase or Murhaba agreement, but defers a predetermined portion as the last and final payment, resulting directly in reduced monthly instalments. The customer remains liable to settle the balloon payment under the hire purchase agreement. This method of finance provides full ownership and is of particular benefit to people who choose to change their vehicles more frequently, every two to three years for example," says Hadi.

Last, but by no means least, Hadi says that you need to consider the lender and its total proposition. This would include transparency in terms of up-front application charges, charges levied during the life cycle of the agreements and charges to the final closure of the loan as these all impact on the total cost of the loan and may not reflect the headline interest rate you were initially promised. Also, Hadi advises you read the terms and conditions of the agreement before you sign, as sometimes ‘the devil is in the detail'. n

Requirements for a car loan

Sundar Parthasarathy, Head of Consumer Assets, Abu Dhabi Commercial Bank, on the documentation needed to apply for a car loan: